Fitch Rates Miami-Dade County, FL's Seaport Revs 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to Miami-Dade County (the County), Florida's $208 million in seaport variable rate demand revenue bonds, series 2014A and 2014B. The revenue bonds are secured by net revenues from PortMiami (the Port). Fitch also affirms its 'A' rating on outstanding seaport revenue bonds. The Rating Outlook on all bonds is Stable.

RATING RATIONALE

The rating reflects PortMiami's importance as the largest port for cruise in the world and among the largest in Florida in terms of twenty foot equivalent unit (TEU) throughput. The rating also reflects the Port's sizeable minimum annual guaranteed (MAGs) revenues that serve to mitigate potential volatility of cruise and cargo revenues from competition and economic cycles, the Port's higher-than-average leverage compared to peers, and the sizeable capital program which includes significant future borrowing. In addition, the rating further reflects the Port's ability to service all current and expected future debt under various sensitivity scenarios at coverage levels commensurate with an 'A' rating.

KEY RATING DRIVERS

STABLE REVENUES:

The Port benefits from stable revenue streams through diversified business lines (cruise operations 54% of revenues, container 38%). The Port does have some exposure to fluctuations in the cruise business and to the competitive port environment in South Florida and the south eastern seaboard.

Revenue Risk - Volume: Midrange

CONCENTRATION MITIGATED BY CONTRACTS:

The Port has some exposure to fluctuations in the discretionary cruise business, though this is partially mitigated by the existence of long-term guaranteed contracts with key cruise customers and long term leases with cargo operators, with minimum guarantees as of October 2014 covering approximately 66% of 2013 operating revenues. Minimum guarantees are expected to cover 70% to 80% of operating revenues in the medium term. Revenue Risk - Price: Stronger

SIZABLE CAPITAL PROGRAM: The Port's sizable five-year capital improvement plan (CIP) totals approximately $1 billion in project costs, with 80% expected to be funded with bonds (includes the 2013 and 2014 issuances as well as $222 million expected future fundings); and the remainder to come from grants (FDOT, federal, and private funds, as well as county funds). Infrastructure and Renewal Risk: Midrange

DEBT STRUCTURE: The 2013 revenue bonds and parity general obligation bonds are fixed rate. The 2014 revenue bonds are variable rate with a five-year direct pay LOC, representing 30% of parity senior debt. Final maturity is in 2051 with debt service expected to escalate through 2022. The MADS rate covenant and additional bonds test (ABT) are quite stringent when compared with peers.

Debt Structure: Midrange

MODERATE FINANCIAL PROFILE: The Port's financial profile has historically generated robust coverage levels above 3.0x for revenue bonds, and 1.6x or higher for revenue and GO bonds combined. The mistreatment of a credit under a cruise line incentive program resulted in a rate covenant violation in 2013, which the Port subsequently resolved. Liquidity is moderate at 144 days cash on hand. With the new issuance, leverage is initially high at 14x for revenue and GO bonds, though these levels are expected to fall to the 5x range over the next five years.

RATING SENSITIVITIES

A second consecutive year of rate covenant violations would likely result in negative rating action.

Maintenance of the rating will depend upon management's ability to deliver projected revenue growth; control expenses; and manage coverage levels in light of increased annual debt service requirements and CIP commitments.

Should additional future borrowing increase leverage significantly without corresponding increases to net revenues, the rating may be pressured.

Should the capital plan be successfully executed and leverage levels decrease as new revenue streams come online, upward rating migration is possible.

SECURITY

The revenue bonds are secured by a pledge of and lien on the Net Revenues of the Seaport Department, and are on a parity basis with the County's outstanding Seaport General Obligation bonds (not rated by Fitch), which are also payable from net revenues of the Seaport Department.

TRANSACTION SUMMARY

The County is issuing $208 million in seaport variable rate demand revenue bonds in order to pay costs of certain seaport-related capital expenditures, including the seaport tunnel, certain passenger terminal improvements, bulkhead, roadway and bridge improvements, gantry cranes, dredging and other projects. Proceeds will also fund the debt service reserve and cover costs of issuance. The bonds consist of $187 million in series 2014A seaport variable rate demand revenue bonds; and $21 million in series 2014B seaport variable rate demand revenue bonds. The series 2014 revenue bonds will be secured by an irrevocable, direct pay letter of credit issued by The Bank of Tokyo-Mitsubishi UFJ (rated 'A' by Fitch), with a final maturity of 2051.

In 2013 PortMiami derived 54% of operating revenue from cruise agreements, 38% from cargo agreements, and 8% from property leases and other sources. Contractual guarantees provide a solid anchor for performance, with 2013's guarantees of $73 million equaling roughly two thirds of the year's operating revenues.

Cruise line agreements provide the PortMiami with annual guaranteed passenger volumes and revenues while providing the cruise lines with incentives for meeting guaranteed levels. PortMiami is guaranteed between $50 million and $60 million in revenues per year through 2018 (includes $7 million/year for the superferry service), with 3% escalation built into the contracts. While 13 cruise companies operate out of PortMiami, three major cruise contracts (Royal Caribbean, Carnival, and Norwegian Cruise Line) provide 93% of guaranteed revenues.

Cargo revenues are also protected through minimum guarantees. PortMiami is a landlord port, with containerized cargo activity being handled by three individual terminal operators occupying approximately 240 acres: Seaboard Marine (Seaboard), South Florida Container Terminal/Terminal Link (SFCT) and the Port of Miami Terminal Operating Company (POMTOC). Together, Seaboard Marine and SFCT guarantee approximately $32 million per year in wharfage/dockage and land rent payments. In addition, the POMTOC agreement was renewed for 15 years (plus two five-year optional extensions). Effective in fiscal 2015, the annual guarantee will increase by approximately $13 million per year, bringing the total to $43.5 million per year in annual guarantees.

The Port is also aided by the pledge of certain State Comprehensive Enhanced Transportation System Tax (SCETS) revenues which begin to flow from the Florida Department of Transportation (FDOT) in 2017 at an estimated $8 million, growing to $17 million in 2018 and thereafter.

Operating margins at the Port have been relatively stable historically, ranging between 30% and 40% in the last five years. Operating revenues grew 5.4% in fiscal 2013 after a 5.1% drop in 2012. Overall, operating revenues have increased at an annual growth rate of 2.9% since 2008, and grew through the 2006 -2008 period despite volume decreases during the economic downturn. For the first four months of fiscal 2014 through January, operating revenues are 9.1% higher than the same period in fiscal 2013, largely reflecting an increase in cruise revenues.

Operating expenses for fiscal 2013 increased approximately 10.9% from 2012, primarily as a result of cruise and cargo incentive payments for the purpose of attracting and/or retaining business. This follows three consecutive years of declines in operating expenses, resulting in a modest compounded annual growth rate of 1.4% since 2008. For the first four months of fiscal 2014 through January, operating expenses were 7.3% lower than the prior year, primarily due to the partial recognition in fiscal 2013 of an incentive payment to a cruise line with the remainder to occur fiscal 2015. Given the Port's increased annual debt service and higher CIP commitments in coming years, it will be important for management to continue to control operating expenses.

The port's rate covenant test is conservative, based on maximum annual debt service (MADS) (1.25x MADS on revenue bonds and 1.10x on GO bonds). In 2013 the port was found to be in violation of the MADS-based covenant, due to an adjustment to revenues required during the 2013 audit. Due to a correction to an accrual entry for a credit due under a cruise line incentive agreement, the port was $1.6 million short of the required revenue level. The port's consulting engineer has determined that steps taken by the port will likely avoid a second covenant violation in 2014 and 2015, and thus the 2013 violation did not constitute an event of default.

While this stringent test provides extra protection for bondholders, it may be challenging for the port to honor in the near term as revenues related to ongoing capital improvements come online. The port is taking steps to modify its master ordinance in order to, among other changes, base the annual rate covenant on current year debt service rather than MADS. However, such a change requires consent of 51% of bondholders and is not expected to come into effect in the near term. Fitch will continue to monitor the port's results going forward. Should a second rate covenant violation seem likely, negative rating action may be warranted.

With the 2014 issuance, as well as an additional $222 million in bond issuances expected in 2016, 2017, and 2018, parity Seaport debt service requirements will step up in coming years. As a result debt service coverage levels will increase from 5.0x and 2.3x in 2013 for revenue bonds and all parity obligations, respectively; to 1.9x and 1.6x respectively under a base case scenario. This scenario contemplates cargo and cruise revenue growth of based on contracted minimum annual guarantees and modest operating expense growth of 3.3% through 2019. This remains well above covenant levels of 1.25x for revenue bonds and 1.10x for GO bonds. Under various sensitivity cases which contemplate lower cruise and cargo results coupled with higher expense growth, coverages are more pressured at 1.5x for revenue bonds and 1.3x for parity obligations. Lower coverage levels are in part mitigated by the Port's liquidity position and relatively secure agreements with many of the Port's tenants. The County indicates that the Port's unrestricted cash position is $26 million as of September 2013, representing 144 days cash on hand based on 2013 operating expenses.

The Port's capital plan through 2019 is sizeable at approximately $1 billion with projects aimed to enhance on-port and off-port infrastructure in advance of the widening of the Panama Canal. To date, projects have been represented to be on time and on budget. Approximately 80% of the plan is debt funded, including the proceeds of the 2013 and 2014 revenue bonds and $222 million in additional borrowing anticipated through 2019, in addition to previously issued parity Seaport General Obligation bonds, and funds provided by the County through the issuance of Capital Asset Bonds and Sunshine State Loans. The remaining 20% is funded with federal and state grants and private funds.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

-- 'Rating Criteria for Ports' (Oct. 3, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Ports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719985

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Emma W. Griffith, +1-212-908-9124
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Charles Askew, +1-212-908-0644
Analyst
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Emma W. Griffith, +1-212-908-9124
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Charles Askew, +1-212-908-0644
Analyst
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com