NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'CCC' rating on approximately $14.6 million of outstanding Commonwealth Ports Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI), senior series 1998A airport revenue bonds. The Rating Outlook for all airport bonds is Negative.
RATING RATIONALE:
The Negative Outlook reflects the potential for weakness in passenger traffic despite the up tick of 1.8% in fiscal 2010. Passenger traffic to the CNMI is tourist driven and heavily dependent on Asian markets, particularly Japan which has been quite dormant for the past few years. Year-to-date fiscal 2011 (as of November) enplanements are up 4.9% compared to a 22% decline in fiscal 2010 due to an increase in tourist inflow from the Japanese market. Chinese, Russian and South Korean markets remain quite consistent going into 2011. Weak traffic continues to pressure airport finances. Preliminary operating revenue and expense figures point to expectations of violating the rate covenant with 0.83 times (x) coverage in fiscal 2010. The draws on cash balances will continue and the depletion of funds is a real possibility over the next several years absent a sustained traffic recovery or a revision of airline rates and charges. Fitch recognizes management's successful cost tightening strategies over the last several years and continued efforts in exploring additional non-airline revenue generating projects. However, should the overarching themes of a sluggish CNMI economy, weak passenger inflow, and lack of financial flexibility deteriorate further, the airports' current rating level could be pressured. The U.S planned relocation of approximately 8,000 military personnel and their dependents from Okinawa, Japan to neighboring Guam by 2014 could lead to inter-Island migration further dampening local demand. As part of the relocation, the U.S Department of Defense (DoD) leased the northern two-thirds of Tinian Island from the CNMI for training groups of 200 Marines or larger due to land availability.
Credit strengths include:
--Essentiality of the airports serving as the gateway to and within the Mariana Islands and CNMI's ability to continue to draw visitors from new markets;
--Management's focus on and effective containment of operating expenses for the past four fiscal years through various adjustments to personnel and operations;
Credit concerns include:
--Potential for prolonged economic weakness of the air trade area due to CNMI's weak underlying economy with an elevated dependence on a diminished tourist base. The fragile tourism sector has led to a reduction in productivity on the islands. The CNMI also faces competition as a leisure destination from other islands in the Pacific;
--Sustained reduction in the airports' traffic base impacting airport revenues and debt service coverage levels. The CPA expects non-compliance with the rate covenant in fiscal 2010;
--Limited financial flexibility will continue to pressure liquidity due to management's reluctance to pass through charges to carriers during weak performing periods.
KEY RATING DRIVERS:
--Continued changes in the underlying service area economy and the airports' ability to maintain a stable traffic base;
--Substantial shift in the airports' short term liquidity and financial flexibility;
SECURITY:
The series 1998A bonds are secured by a pledge of gross airport revenues generated by the operations of the airport, including Passenger Facility Charges (PFC) eligible for payment of debt service.
CREDIT SUMMARY:
Fiscal 2010 was the first year since 2004 that saw growth in passenger traffic adding 8,375 enplanements or 1.8% to its 475,769 enplanement base. Management is fairly optimistic about traffic performance in fiscal 2011 and believes that another year of positive growth is probable should the slight increase in travelers seen in the first quarter continue throughout the year. Overall airport traffic has been declining in recent years due to the loss of signatory carriers (Continental Airlines and Japan Airlines) being replaced with airlines operating charter flights on an as need basis. The slower demand from the Korean and Japanese markets prompted airlines to reduce seat capacity and suspend flights during slow periods. The airport system lost about one third of its traffic base since 2004. The airports' prolonged period of traffic recovery is consistent with weak traffic attributes and a lack of resiliency to downturns.
Service at the airports is dominated by Delta Airlines and Asiana Airlines, combined, accounting for approximately 60% of total traffic served at Saipan airport - CNMI's main gateway airport. Delta Airlines reduced passenger traffic by 17.5% in fiscal 2010; however volume was picked up by several other carriers. This reduction was expected at the time Fitch last reviewed the credit. The CPA expects a new carrier, Sichuan Airlines, to start service from various Asian cities to Saipan in 2011. The airline has received approval from the Department of Transportation and is now awaiting FAA approval. A full or partial loss of service from one of the airports' main signatory carriers would likely have credit implications.
Fiscal 2010 operating revenue is expected to come in 3.4% lower than the previous year at $10.6 million. The CPA continues to expand non-aviation revenue sources and recently completed appraisals of airport properties which are expected to enhance future leases. Operating revenue in fiscal 2009 jumped 29% over 2008 due to a revision of airline rates and charges. Management has not passed any additional increases since, feeling that it could deter carriers from serving at the airport especially when the global economy has not fully recovered. Erosion of the airports' revenue generating base constrains revenue generating sources and limits the flexibility of producing sufficient revenues to meet debt service. Coverage for fiscal 2009 was 1.44x while 0.83x coverage is expected for fiscal 2010. A $1 million unbudgeted but necessary contractual expenditure to meet certain federal requirements is responsible for the deficiency in coverage. Operating costs are projected at $10.5 million, 1.7% higher than the previous year. CPA continues to make efforts to reduce operating expenses through the use of scheduled work reductions and the elimination of non-essential expenses. Operating costs are 7.9% lower than in fiscal 2006.
Preliminary cash balances show a $1.4 million increase over fiscal 2009 attributed to better control of costs and aggressive collections of past due accounts, yet liquidity levels remain weak with 136 days cash on hand. Cost per enplanement (CPE) is expected to slightly decrease to the $15 range in fiscal 2010 as traffic improves. In fiscal 2009, CPE doubled to $16 over the previous year due to the substantial increase in airlines charges. Fitch forecast scenarios for small leisure airports contemplate a 10% loss in traffic and a seven-year recovery. While Fitch acknowledges the airport's austerity measures, under a stress scenario and absent revenue generating alternatives and a sustainable traffic recovery, the airports' unrestricted liquidity is expected to be depleted by 2019 at the expense of subsidizing debt service and maintaining a low cost structure to carriers. The airports exhibit a heighten vulnerability to macroeconomic stresses due to the Islands' natural dependence on external economic factors.
The CPA owns and operates three airports in the CNMI, the largest of which is Saipan International Airport. The commonwealth consists of a chain of 14 islands of which four are inhabited. The islands are located in the North Pacific Ocean, approximately 1,458 miles southeast of Tokyo, Japan and 5,969 miles west of Los Angeles. As CNMI is a commonwealth of the United States, U.S. federal law and regulation, such as minimum wage law requirements, immigration restrictions, and environmental regulation all have an impact on the island's economy. The islands are also subject to weather related events such as typhoons due to their geographical location in the Pacific.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Airports' (Nov. 29, 2010);
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 13, 2010).
Applicable Criteria and Related Research:
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
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