CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $26.9 million of outstanding Canaveral Port Authority (CPA) port revenue bonds, series 2005 and 2006 A&B. The Rating Outlook for all authority bonds is Stable.
The rating affirmation reflects a cruise-focused port with an established operating history, recent sustained revenue growth from a strong tourist-dependent market alongside favorable operating contracts and cost management, and an aggressive yet flexible capital program with no material borrowing anticipated. Furthermore, the conservative debt structure, modest leverage, and strong coverage metrics would remain resilient under more volatile conditions which Fitch views as credit strengths.
KEY RATING DRIVERS
CRUISES ANCHOR PORT OPERATIONS, Revenue Risk: Volume - Midrange
Orlando's tourist market drives CPA's Disney, Royal Caribbean, and Carnival cruise traffic. Over 80% of operating revenue comes from the cruise business which has been resilient during economic cycles and declining discretionary spending.
CRUISE CONTRACTS SUPPORT REVENUE, Revenue Risk: Price - Midrange
More than half of operating revenue is contractually obligated from cruise lines, and staggered major cruise lease expirations stabilize net revenues. Cargo commodity business lines complement the cruise activities but are more volume dependent and can cause some revenue fluctuations.
ELEVATED YET FLEXIBLE CAPITAL PROGRAM, Infrastructure Development / Renewal - Midrange
The $641 million 2014-2019 capital improvement program (CIP) is larger than in past years but is flexible depending on demand and federal and state grants to fund the majority of large projects. Management has a demonstrated history of adjusting borrowing plans based on need. No additional near-term debt is anticipated.
FIXED-RATE DEBT MATURES NEAR TERM, Debt Structure: Stronger
CPA's capital structure includes long-term fixed-rate Fitch-rated revenue bonds that mature in 2021 as well as non-Fitch-rated privately placed debt that extends to 2034 on parity with the Fitch-rated bonds. The rate covenant and additional bonds test (ABT) provide sound protection as they are tied to producing at least 1.25x coverage of maximum annual debt service (MADS) reached in 2016 at $19.6 million.
RESILIENT FINANCIAL METRICS
CPA shows healthy financial performance evidenced by 5.4% revenue compound annual growth rate (CAGR) since 2004 despite the economic downturn along with cruise and/or cargo volatility. The debt service coverage ratio (DSCR) has remained above 2.5x throughout the past decade but dropped slightly to 3.15x from 3.42x last year due to increased operating costs associated with new operating facilities. Days cash on hand (DCOH) increased to 143 days in FY2014 from 137 days at FYE 2013, and net debt-to-cash flow available for debt service (CFADS) is modest at 2.54x. CPA is legally able but has yet to levy an ad valorem tax since 1986, which further enhances financial flexibility.
PEER ANALYSIS
CPA depends more on cruise revenues than other 'A' rated ports in Fitch's portfolio. Similar to other Fitch Florida ports like Tampa, Jacksonville, Broward, and Miami, CPA's leverage, coverage, and capital plan size fall in the middle, but CPA has seen larger revenue growth than others mainly due to their heavy dependence on cruise revenues.
RATING SENSITIVITIES
--Negative: Substantial changes in cruise passenger traffic that weakens lease renewal trends;
--Negative: Divergence from projected leverage and coverage ratios due to changes in cost structure and/or scope of capital plan;
--Positive: Significant increases in cargo tonnage processed at the port;
--Positive: Marked increase in diversity and strength of contracted revenues outside of the cruise business.
CREDIT UPDATE
While the authority's operating margin excluding depreciation and amortization fell again in fiscal 2014 to 51%, it has remained above 50% since 2011 with the highest achieved in 2012 at 59%. Operating revenues have increased 11%, on average, since 2010 and grew 5.4% to $71.9 million in fiscal 2014. Breaking down 88% of total revenues, $63.3 million came from ships and $58.3 million came from cruises. Through February 2015, fiscal 2015 YTD total operating revenues are up 6%, total operating expenses are up 10%, but total net income has increased 3%. Management forecasts further OpEx increases (15% fiscal 2015) due to continued increased preventative maintenance as well as having to open and operate new facilities such as the Exploration Tower which require increased staff.
CPA maintains minimum annual guarantees (MAG) for both cargo and cruise companies which have historically represented over two thirds of operating revenues. In addition to Disney, Carnival, and Royal Caribbean, the 2015 Norwegian New Deal has brought Norwegian Cruise Lines (NCL) back for the first time in four years along with new luxury ships, and guarantees port of calls from New York City ships for three years. Fitch notes that discretionary non-essential cruise services expose CPA to economic pressures which could stress the authority's financial performance and flexibility despite MAG structures in place.
Multi-day cruise passenger volume increased 3.9% in fiscal 2014 to 3.8 million over a 1.2% decline realized fiscal 2013. The 2015 budgeted total cruise passengers figure of 4.2 million in 2015 is the result of increased cruise traffic and is still below the pre-recession total peak of 4.6 million which occurred in 2004, and Fitch believes that the one-day cruise business is on its way out. The 2,700-passenger Disney Magic left CPA last year, but Disney's two other ships (Dream and Fantasy) carry 4,000 passengers each and brought in over 30% of fiscal 2014 revenues as well as over 35% of fiscal 2014 passengers. Disney is on track to repay CPA sooner than 2023 for the $22 million worth of improvements completed in 2010 because passenger facility charge (PFC) revenues have increased every year since inception. Disney's agreement runs through 2027 and guarantees 150 annual calls with an increased MAG of $18.6 million for fiscal 2015. Carnival MAGs are $7 million and could increase to $11 million as their new president modernizes the fleet and adds new services to Bermuda.
Royal Caribbean's agreement with CPA is through 2024, and similar to Disney, is providing an additional $48 million from PFC revenues for the new Terminal 1 Complex (construction began in fiscal 2014). The PFC was increased to $6 from $4.03 and began on April 1, 2015. Cruise spending is usually discretionary and exposed to volatile economic cycles, but CPA has retained multi-day cruise passenger traffic from Orlando's Disney tourist anchor. Through February 2015, fiscal 2015 year-to-date (YTD) cruise passengers are up 3% and cruise revenues are up 8%, while cruise ships are down -1%.
While CPA is exposed to volatile petroleum tonnage and construction activity as well as cruise and cargo competition, cargo revenues have only made up 7%-12% of total port revenues since 2007, and CPA's less diverse cargo operation relative to Florida peers limits tonnage to homebuilding and infrastructure. Fiscal 2014 cargo ship revenues declined 10.5% alongside a 13.4% drop in cargo tonnage to 3.35 million short tons, again due to declines in petroleum products which lowered revenue 17% despite the 3% increase on tariff items (which excluded parking). Petroleum products have comprised the majority of total port tonnage, but limestone was the only commodity to increase this past fiscal year (limestone revenues increased 20.3%). Through February 2015, fiscal 2015 YTD tonnage is up 33% while cargo revenues are down 5% versus the same months in fiscal 2014. Notable increases include scrap metal, petrol, granite, and slag while decreases include limestone and concentrate.
CPA has tactfully expanded facilities alongside demand such as deepening and widening the Atlantic Ocean entrance from a current width of 400ft to 500ft for $128.5 million, which is significantly lower than what Fitch has seen on other deepening and widening projects because of the channel's soft bottom; $40 million is already secured for phase one, and phases 2-4 total $88.5 million. Florida Department of Transportation (FDOT) grants have helped with dredging expenses. Wider and deeper channels have brought more international ships because of ample commodity storage over other Florida ports.
CPA's large capital plan is flexible, and management has delayed the 2015 new issue for an auto processing facility until it is needed. CPA is spending $4.5 million to repave 22 acres of port land for cars as needed and will develop further with structured parking if demand warrants. Central Florida boasts heavy rental car use due to the lack of competing alternatives as well as the largest global rental car market at Orlando International Airport. Morton Salt has increased tonnage 29% fiscal 2015 YTD, and management reports that their expansion is going well. An additional 0.17 acres has been secured to finalize the design of the new distribution warehouse, and phased construction will begin this spring allowing cargo to continue move efficiently.
Management was able to contain operating costs through the recent downturn, thus maintaining strong coverage and margins. DSCR in 2014 was 3.15x, and DSCRs have been above 3x since 2012. Fitch's base case assumes 1% growth in passenger traffic and cargo combined with expense growth of 3.5% resulting in operating income between $39 million and $61 million. Under this scenario, DSCRs are expected to remain above 2x, with leverage starting at 4.77x before dropping down to 2.29x as debt is paid off. Fitch's rating case assumes a -3.2% CAGR in passenger as well as cargo traffic due to a severe dip midway through the five-year forecast period along with higher overall expense growth resulting in operating income growing only to $48 million by the end of the forecast. DSCRs would still remain above 2x, but leverage would only fall to 2.9x as debt is paid off.
Port Canaveral is close to Orlando's Walt Disney World and Universal Studios, which are popular tourist destinations and support Canaveral's cruise business. Exports go to the Caribbean, Central America, Europe, and Africa while imports head for the South Eastern U.S, Central Florida, and 13 additional MSAs with an estimated 90% beyond the immediate MSA.
SECURITY
Parity bonds are secured by a first lien on gross revenues derived from port operations. Supplemental revenues, including federal or state grants, along with ad valorem taxes or revenues derived from the operation of special purpose facilities are not pledged for debt service.
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. 16, 2014).
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=795788
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982483
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