$17.6M CPA bonds on negative watch

SAN FRANCISCO—Fitch Ratings has placed the $17.6 million Commonwealth Ports Authority’s airport revenue bonds on Rating Watch Negative, reflecting the airport’s operational deterioration that is resulting in narrowing financial margins and inadequate debt service coverage.

Fitch believes a technical bond default may occur in fiscal 2006, reflecting debt service coverage below the 1.25 times rate covenant.

CPA management has told Fitch, however, that the September bondholder payments will be made in full and on time with operating revenues and available cash. The series 1998 bonds are secured by a pledge of net airport revenues including approved Passenger Facility Charge moneys.

Fitch expects to receive preliminary year-end fiscal 2006 figures within the next six weeks, at which time a final determination will be made on the rating. In order for CPA to maintain its current ‘BBB-‘ rating, management needs to present a workable plan to return debt service coverage and financial margins to levels consistent with that rating. Otherwise, a downgrade to the ‘BB’ category is probable.

Operational deterioration stemmed from Japan Airlines’ decision to cease passenger service to CNMI, resulting in a 30 percent enplanement decline. While Northwest Airlines backfilled a portion of this loss, overall enplaned passenger declines year-to-date fiscal 2006 are down 12.2 percent.

“As a result of this operational shock, the airport’s merely adequate financial margins weakened,” a Fitch statement said.

Credit strengths include the necessity of airport and passenger air service as a basic mode of transportation for an island economy, management’s experience of operating through volatility, successfully implementing a PFC, and obtaining Federal Aviation Administration grants.

CPA’s airport revenue bonds had previously received a negative rating.

Based on a 2002 technical default and low passenger figures, Fitch had placed CPA on rating watch negative in May 2003 and then affirmed the watch in February 2004.

But the international credit rating agency removed the bonds from negative watch in December 2004, following CPA’s rebounding enplanement levels, recovering financial position, and the implementation of a $4.50 terminal fee beginning January 2005.

According to the fiscal 2005 draft audit, the airport had sufficient liquidity of $7.8 million in unrestricted cash, providing the airport with 274 days cash on hand. Another $2.9 million in cash (debt service reserve fund, construction funds, and operating and maintenance reserve) is restricted to purpose but available to meet airport obligations. The fiscal 20005 operating margin was adequate at 17 percent and debt service coverage was also healthy at 1.90x (including the use of approved PFC revenues).

Also, management has some financial flexibility, considering the PFC revenue stream primarily reimburses the airport for past capital projects; therefore, almost all PFC moneys are liquid and available for airport needs.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. (Business Wire)