Rating agencies seek bond repayment assurance

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Posted on Dec 14 1998

Two US-based bond rating agencies have urged the Commonwealth Ports Authority to fix the financial crisis besetting the agency by increasing the airport and seaport rates beginning next year so that it can pay the $53 million bonds.

This was the recommendation of representatives of Fitch IBCA and Standards & Poors in a recent meeting with officials of the ports authority in California before the two agencies can give an investment grade rating on the bonds which would mean a reduction in interest rate.

Currently, the ports authority is paying a 6.25 percent interest for the airport bond and 6.40 interest for the seaport bond. Both series were sold non-rated.

An analysis on the financial capability of the ports authority to pay its debt was based on the two feasibility studies conducted on the airport and seaport. The airport study was made by Ricondo & Associates while the seaport study was carried out by Booz, Allen & Hamilton.

Representatives from the ports authority led by Carlos H. Salas, executive director; Roman Tudela, board member; and Rex Palacios, financial consultant gave an overview of the operations of CPA including the financial condition of the agency amid Asia’s financial crisis.

Fitch IBCA and Standards & Poor’s want to know first how the ports authority plan to deal with the financial problems plaguing the CPA before the agencies give any rating to the bonds, said Palacios. Early indications, however, show that Fitch IBCA “less committed” in providing a bond rating, he said.

Both the airport and seaport studies gave a bleak outlook on the effect of Asia’s financial crisis on the operations of the ports authority.

The airport study presented a more liberal analysis when it claimed that the economic problems in Asia will still be felt until the year 2000. The seaport study, on the other hand, gave a more conservative view when it said the crisis will affect the island until 2002.

Due to the regional crisis, the study said the airport will only grow by four and a half percent which is not sufficient to pay the $20 million airport revenue bonds. The projected growth is also way below the previous record in 1997 when the growth rate of the aviation division was about 14 percent.

As a result, it is necessary for the ports authority to increase its landing fee by 68 percent from 85 cents per 1,000 gross landing rate to $1.40. Likewise, CPA must also look at how it can make additional revenue from non-aviation sources since the decline in tourist arrivals has drastically dropped the airport earnings.

According to Booz, Allen & Hamilton study, the pullout of the garment industry would have tremendous impact on the seaport revenue specifically its capability to service its $33 million bonds. Currently, more than 50 percent of the containers coming in and out of Saipan belong to the garment industry.

It noted that the garment industry shielded the CNMI from the direct impact of Asia’s economic turmoil. However, the future of the industry on the island remains uncertain because of the implementation of international trade agreements and potential legislation from the U.S. Congress.

If the industry leaves the CNMI, the seaport would have to increase its rate by 30 percent in 1999, another 30 percent in year 2000 and 2002. An additional 30 percent increase would be carried out every five years since payment of the bond will be for 30 years.

Furthermore, the ports authority would have to reduce its personnel cost by 15 percent in fiscal year 2000 and another 15 percent in year 2001.

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