Fitch Affirms Canaveral Port Authority Seaport (FL) Revs at 'A'; Outlook Stable
Fitch Ratings has affirmed the 'A' rating on approximately $13 million of outstanding Canaveral Port Authority (CPA) port revenue bonds, series 2006 A&B. The Rating Outlook for all authority bonds is Stable. CPA also has approximately $184 million of unrated debt obligations.
The rating affirmation reflects the cruise-focused port with an established operating history, recent sustained revenue growth from a strong tourist-dependent market alongside favorable operating contracts and cost management, and an aggressive yet flexible capital program with no material borrowing anticipated. Furthermore, the conservative debt structure, modest leverage, and strong coverage metrics would remain resilient under more volatile conditions which Fitch views as credit strengths.
KEY RATING DRIVERS
Revenue Risk: Volume - Midrange
CRUISES ANCHOR PORT OPERATIONS: Orlando's tourist market drives CPA's Disney, Royal Caribbean, and Carnival cruise traffic. Over 80% of operating revenue comes from the cruise business which has been resilient during economic cycles and declining discretionary spending.
Revenue Risk: Price - Midrange
CRUISE CONTRACTS SUPPORT REVENUE: More than half of operating revenue is contractually obligated from cruise lines, and staggered major cruise lease expirations stabilize net revenues. Cargo commodity business lines complement the cruise activities but are more volume dependent and can cause some revenue fluctuations.
Infrastructure Development/Renewal - Midrange
ELEVATED YET FLEXIBLE CAPITAL PROGRAM: The $933 million 2015-2020 capital improvement program (CIP) is larger than in past years but is flexible depending on demand. Fitch expects that federal sources and state grants will be available to fund approximately 33% of the CIP. Management has a demonstrated history of adjusting borrowing plans based on need, but no additional near term debt is anticipated.
Debt Structure - Stronger
CONSERVATIVE DEBT PROFILE: CPA's capital structure includes long term fixed-rate Fitch-rated revenue bonds that mature in 2021 as well as non-Fitch rated privately placed debt that extends to 2034 on parity with the Fitch-rated bonds. The rate covenant and additional bonds test (ABT) provide sound protection as they are tied to producing at least 1.25x coverage of maximum annual debt service (MADS), which will be reached in 2016 at $19.6 million.
RESILIENT FINANCIAL METRICS: The debt service coverage ratio (DSCR) remained above 2.00x throughout the past decade but dropped to 2.13x from 3.16x in 2015 due to increased principal and interest related to a private placement new issue. Days cash on hand (DCOH) declined to 106 days from 169 days at fiscal year-end in 2014, and revenue bond net debt-to-cash flow available for debt service (CFADS) remained around 4x.
CPA depends more on cruise revenues than other A-rated ports in Fitch's portfolio. Similar to other Fitch Florida ports like Tampa ('A'/Outlook Stable), Jacksonville ('A'/Outlook Stable), Broward ('A'/Outlook Stable), and Miami ('A'/Outlook Stable), CPA's leverage, coverage, and capital plan size fall in the middle, but CPA has seen larger revenue growth than others mainly due to their heavy dependence on cruise revenues.
Negative: Substantial changes in cruise passenger traffic that weakens lease renewal trends;
Negative: Divergence from projected leverage and coverage ratios due to changes in cost structure and/or scope of capital plan;
Positive: Significant increases in cargo tonnage processed at the port;
Positive: Marked increase in diversity and strength of contracted revenues outside of the cruise business.
SUMMARY OF CREDIT
For the first four months of fiscal 2016, year-to-date revenues are up 2% mostly due to increased cargo tonnage which is up 37% year-to-date through January in comparison to the same months last year due to increased petroleum from lower fuel prices as well as lumber from more highway/housing construction activity. Fiscal year-to-date 2016 cruise revenues are flat as expected, but should increase over fiscals 2016-2017 as new contracts come on line as well as from increased parking revenues following the $1/day fee increase effective March 23, 2016.
Following three prior years of decline, cargo tonnage at the port increased 23.2% during fiscal 2015 to 4.1 million short tons but has still declined at a -1% CAGR since fiscal 2006. CPA continues to increase cruise tariffs 3% annually as expected and additional single as well as multi-day services contributed to the 8.1% increase in cruise ship revenue over fiscal 2015.
Fiscal 2016 year-to-date operating expenses (OpEx) are up 9% due to increased benefits, and management is forecasting a 12.4% OpEx increase in total for fiscal 2016 related to increased labour costs. CPA has been restructuring their teams as well as hiring new managers, benefits have gotten more expensive, and 2016 will show the first full year of contracted out police services to the county sheriff.
CPA shows healthy financial performance evidenced by 6.1% revenue compound annual growth rate (CAGR) since 2005 despite the economic downturn alongside cruise and/or cargo volatility. CPA is legally able to levy an ad valorem tax but has not since fiscal 1986 which further enhances future financial flexibility.
Furthermore, Fitch positively views that Morton Salt has increased their lease and is currently building a facility to process consumable products like table salt in addition to their current non-consumable (road salt) production. Cemex cement will be operational again come fiscal 2017, and CPA also recently started a new contract with Autoports that will bring new cars to CPA and generate further revenue through their tenant leases. CPA is in progress of renovating most cargo terminals, and once terminal renovations are complete, the terminals will be able to service larger ships. As these developments should support a continuation of positive operational trends, the Fitch base case adopts management's revenue projections from these increased developments while the Fitch rating case tested half the revenue growth.
Fitch-calculated coverage dropped from 3.15x to 2.13x during fiscal 2015 due to increased debt service obligations following a private placement. Even at the lower coverage, coverage is still consistent with the current rating level as long as coverage remains at least at this range. Management does not plan to issue additional port revenue bonds in the near term as long as borrowing against their current line of credit remains flexible which Fitch continues to monitor.
Revenue bond net-debt-to-CFADS (leverage) remains moderate for the rating category, increasing to 4.50x from 2.24x during fiscal 2015 again because of the private placement. Leverage is expected to decline to below 3x going forward even in the Fitch rating case given increased contractual revenues.
Fitch's base case assumes total operating revenue growth around 6% on average through 2020 given increased contractual revenues. Total operating expenses, excluding depreciation, are estimated to grow at around 7% five-year CAGR given management's projections of known increased costs. Under this scenario, DSCR is expected to increase from 2.19x to 2.59x, with leverage starting at 3.86x before declining to 2.06x by 2020 as debt is paid off.
Fitch's rating case assumes 2% annual growth in total operating revenues and 1% annual expense growth, excluding depreciation, through 2020 due to revenue shocks mid-forecast. Under this scenario, DSCR is still expected to remain above 2.25x, with leverage still declining to below 2.40x by 2020 as debt is paid off.
Parity bonds are secured by a first lien on gross revenues derived from port operations. Supplemental revenues, including federal or state grants, along with ad valorem taxes or revenues derived from the operation of special purpose facilities are not pledged for debt service.
Additional information is available at: www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Ports (pub. 20 Oct 2015)
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