CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'B-' the rating on approximately $14 million of outstanding Commonwealth Ports Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI), senior series 1998A airport revenue bonds. The Rating Outlook is revised to Positive from Stable.
The Positive Outlook reflects improved financial flexibility resulting from increased airport utilization as well as growth in pledged revenues and balance sheet liquidity. Further, management's prudent expense management has contributed to rising debt service coverage levels and CPA's ability to stockpile surplus cash. To the extent the positive trends in CPA's operating and financial performance continue, a higher rating may be warranted.
KEY RATING DRIVERS:
--Highly Volatile Enplanement Base: The airport system is an essential enterprise, serving as the gateway to and within the Mariana Islands. The enplanement base of 575,000 passengers is relatively small taking into account the overall population base and the island's more limited, weaker economy. Traffic performance is potentially vulnerable to underlying economic stresses given the significant component of traffic tied to the tourism industry. Revenue Risk-Resilience: Weaker.
--Limited Cost Recovery: Rate setting practices with airlines are not clearly established and have been observed to be more reactive, based on financial pressures, than proactive. In Fitch's view, the airport retains limited pricing power which restrains financial flexibility and has pressured liquidity in previous years. Recent approval by the Federal Aviation Administration (FAA) to allow the airport to utilize 100% of passenger facility charge (PFC) collections for debt service provides enhanced cushion to manage revenue levels to support financial obligations while keeping airline costs stable. Revenue Risk-Price: Weaker.
--Conservative Capital Structure: The authority maintains 100% fixed-rate, fully amortizing debt. Annual debt service payments are essentially level and final maturity on the bonds is in 2028. Debt Structure: Stronger.
--Improving yet Volatile Financial Metrics: CPA generated a robust coverage ratio of 3.4 times (x) (2.4x without 100% PFCs as gross revenues) for fiscal 2012 (unaudited figures). Still, coverage levels have greatly fluctuated over time and failed to meet the financial rate covenant test (1.25x) as recent as fiscal 2008. Partially mitigating this volatility is the very low leverage of 0.5x net debt-to-cash flow available for debt service (CFADS), supported in part by treating all PFCs collected as pledged revenues and improving balance sheet liquidity. Days Cash on Hand (DCOH) has grown significantly over the past three years to 284 days in fiscal 2012. Debt Service and Counterparty Risk: Mid-range.
--Moderate Capital Plan: The authority's capital improvement plan is modest at $44 million through fiscal 2015 and predominantly funded through FAA grants with no future anticipated debt issuances. To the extent that a significant portion of PFC revenue is needed for debt service, it could hamper the airport's ability to provide required matching funds and thus limit grant receipts. Infrastructure Development: Mid-range.
WHAT COULD TRIGGER AN UPGRADE:
--Continued improvements in the underlying service area economy and the airports' ability to maintain or grow its current traffic base;
--Sustained favorable trends in balance sheet liquidity and strong financial ratios over the next one to two years would strengthen CPA's credit quality.
--Material declines in enplanement volume or in coverage, resulting from increased operating expenses and/or the CPA Board's failure to sufficiently apply the full collection of PFCs as gross revenues, could pressure the current rating.
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 eligible for payment of debt service. Fitch notes that CPA Board Resolution No. 2011-01 now designates all PFC Revenues as gross airport revenues.
CREDIT UPDATE:
The CPA airports are heavily reliant on tourism and leisure travelers, creating an elevated degree of vulnerability to economic recessions both within its narrow local market as well as to the larger, neighboring Asian markets. Enplanements tend to show elevated fluctuations over time. Most recently, enplanements had rebounded strongly by growing nearly 26% in fiscal 2012. This growth more than erased the 5% loss experienced in fiscal 2011, which was impacted by the confluence of natural and nuclear disasters in the region, offset by the improving tourism industry as well as additional service by carriers. Collectively, Delta Airlines and Asiana Airlines maintain their dominance with a combined market share of approximately 60% of total traffic. Overall, service remains essential to this island economy and management indicated that multiple airlines are looking to begin or increase service levels.
The airports operate under a residual agreement with its carriers. However, the CPA has shown a history of reluctance to consistently pass through the full cost requirements given the fragile economy and nature of the airline industry, negatively impacting financial flexibility and resulting in past covenant violations. Management's actions in fiscal 2009 to increase airline rates have resulted in improved net revenues with coverage increasing well above the 1.25x requirement. Unaudited fiscal 2012 coverage is expected to be close to 3.35x following 1.95x coverage in the prior year, based on pledged revenues inclusive of all PFC collections. Providing somewhat of a consistent revenue stream to help service debt, non-airline revenues have been relatively stable over time and management continues to try to expand those sources. Leases just went up and a new Aircraft Rescue and Fire Fighting (ARFF) training facility to be constructed should further help financial flexibility. Additionally, management continues to closely scrutinize all expenses and should experience future savings on pension liabilities from the switch to social security.
Cost per enplanement (CPE) is estimated at around $13.41 for fiscal 2012 and is expected to remain in that range barring any wide swings in enplanements or changes to airline rates. This is a notable reduction from the $15-$16 range that had been the new baseline CPE since the airline rates went up in fiscal 2009.
CPA's overall leverage is relatively high given the operational profile of the airports; however its net debt-to-CFADS is very low at 0.5x taking into account its growing liquidity (284 days cash on hand), reserves, and ability to use all of its PFCs as cash flow. As a result of the airport's improved operations, conservative capital structure, and flat debt service profile, Fitch projects coverage to remain at or above covenant through a five-year forecast period, even when only the eligible portion of PFCs for debt service are applied.
CPA's capital improvement plan through 2015 is modest at $44 million and 95% of the funding comes from FAA grants. The largest project is a $17 million Regional ARFF Training Facility that should be a revenue-generating project for the airports. Other projects include: rehabilitating the 30 year old runway, installation of new generators for the terminals, Tower and Airport Fire Station, and various renovations to the international and commuter terminal. These are in addition to several future anticipated projects. Management indicated that no future debt issuances are currently planned.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 11, 2012;
--'Rating Criteria for Airports', dated Nov. 27, 2012.
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 Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970
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