Fitch affirms ‘BB’ rating of CNMI Seaport Revs; outlook stable
Credit rating agency Fitch Ratings has affirmed the “BB” rating on approximately $14.2 million of outstanding Commonwealth Ports Authority, Commonwealth of the Northern Mariana Islands senior series 1998A and 2005A seaport revenue bonds. The rating outlook is stable.
The rating reflects the essentiality of the ports to a small, island economy amidst high exposure to economic volatility from tourism and a nearly 100% import-based cargo operation. The rating also considers CPA’s sustained revenue performance and history of controlled expenses. Despite recent adverse impacts on operational performance, CPA is expected to maintain financial metrics supportive of the current rating level. Under Fitch’s rating case scenario, coverage levels average 1.5x through 2027. CPA further benefits from robust liquidity levels that provide some mitigation to a prolonged softening of cargo demand.
KEY RATING DRIVERS
Revenue Risk — Volume — Weaker
Concentrated but Vital Cargo Base
The seaports remain essential for the import of goods to an island economy; however, there is potential for stagnant operational trends, due to the CNMI’s exposure to macroeconomic factors and its elevated dependence on a limited tourist base. Volume stability is expected, given that food and fuel related cargos account for approximately 50% of import-dependent revenue tonnage.
Revenue Risk — Price — Weaker
Limited Pricing Power
The CNMI’s narrow economy and exposure to economic volatility limit management’s economic flexibility to raise rates on seaport system tenants and users. Following the last increase in 2009, the authority’s focus has instead been on effective containment of operating expenses.
Infrastructure Dev. & Renewal — Midrange
Modest Capital Improvement Plan
The ports once handled nearly twice as much cargo and are in satisfactory condition to deal with current and forecasted demand. The authority’s capital improvement plan is manageable and funded with grants and internally generated funds. No additional debt is anticipated in the near to medium term.
Debt Structure — Senior — Stronger
Conservative Capital Structure
The authority maintains 100% fixed-rate, fully amortizing debt with a level debt service profile and a 2031 final maturity. Structural features and reserves are sufficient and consistent with other Fitch-rated ports.
CPA maintained favorable leverage and liquidity metrics offset by a modest coverage ratio of 1.4x in fiscal 2022 (unaudited). Estimated fiscal 2022 net debt-to-cash flow available for debt service is negative, reflecting cash balances exceeding debt outstanding. The CPA maintains strong balance sheet cash and reserves available for operating expenses, with days cash on hand currently exceeding 1,200. These liquidity and leverage metrics provide the CPA with some degree of flexibility to meet financial commitments in weak performing periods. Rating case coverages are expected to average 1.5x through the projection period.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Revenue trends have been volatile since 2018, attributed to the pandemic and reductions in inbound revenue tonnage and damage from storms such as Super Typhoon Yutu that have passed through the CNMI. While the ports are located in an island economy with exposure to tourism, CPA also has a mix of non-operating revenues (grants and interest income) to help offset declines in operating revenue.
The seaport system benefits from a natural monopoly position, with 90% of goods entering the Northern Mariana Islands passing through the ports of Saipan, Tinian, and Rota. Total tonnage in fiscal 2022 improved slightly by 0.6% from the prior year, with nearly 455 thousand metric tons of cargo moving through the ports (representing 80% of fiscal 2019 volumes).
Total operating revenues for the seaport system, which consist primarily of harbor and non-harbor revenues, increased 18.5% to $7.7 million in fiscal 2022 (unaudited). Estimated operating expenses in fiscal 2022 (unaudited) increased 22.4% to $3.5 million from $2.8 in fiscal 2021, primarily due to increases in employee salaries and wages, operating and maintenance and insurance. CPA also experienced cost increases for supplies and materials attributed to supply chain challenges and inflation.
Debt service coverage in fiscal 2022 (unaudited) is estimated at 1.4x, and leverage remains negative, benefitting from strong balance sheet cash and reserves. Though coverage is expected to remain depressed over the next 1-2 years, the slower recovery of seaport operations and revenue is offset by a low debt service obligation of just over $3 million through 2028 before stepping down to $540,000 through maturity in 2031.
Given that cargo volumes have not yet recovered to historical levels, Fitch’s rating case is also considered the base case. Fiscal 2022 revenue performance is based on preliminary actual performance. The differences for each case focus on the level and speed of cargo revenue recovery starting in 2022 and through the next several years.
Fitch’s rating case reflects the budget for fiscal 2023, followed by conservative expectations of future performance thereafter. Fitch assumes revenue recovery to 93% in fiscal 2024 and a full recovery to 2019 levels by fiscal 2025, followed by low growth of 1.5% per year thereafter. Under the rating case, DSCR averages 1.5x through 2027 and 4.0x through debt maturity in 2031 and the leverage profile remains negative.
Fitch’s downside case reflects a prolonged recovery back to 2019 levels. Revenues are expected to recover to 88% in fiscal 2024, 93% in fiscal 2025, and 100% of 2019 levels by fiscal 2026. Similar to the base case, Fitch assumes low annual growth of 1.5% thereafter through maturity. Under these assumptions, DSCR averages 1.4x through 2027 and 3.9x through maturity, with leverage remaining negative.
The seaport bonds are secured solely by gross seaport revenues and certain accounts established pursuant to the bond indenture. (PR)