Fitch Ratings revises the Rating Outlook to Negative from Stable on approximately $35 million of the Commonwealth Ports Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI), 1998 and 2005 senior series A seaport revenue bonds. Fitch also affirms the rating at 'BB-'. The bonds are secured by a pledge of net revenues.
The 'BB-' rating of the seaport credit indicates the possibility of credit risk developing due to the deterioration of the CNMI economy in the past two years, however, a margin of safety and sufficient cash balances remain allowing financial commitments to be met. The loss of the garment industry has had material impact on CPA's harbour operations while a fragile tourism industry has led to a reduction in productivity on the Islands. However, CPA's seaports will remain essential to the transportation of goods via international and internal waterways. Total revenue tonnage for fiscal 2009 fell by 22.9% or 108,822 revenue tons from 474,274 in the previous year. Outbound cargo sharply decreased by 51% and is largely responsible for this downward trend as ready-for-sale clothing products, once manufactured by the garment industry, are no longer being exported. As of September 2009, total outbound clothing tonnage and inbound garment tonnage came to a complete halt from over 6,252 revenue tons in October 2007. Fitch notes that the last audited financial statement for the CPA was 2007. While Fitch has been provided with drafts of the 2008 and 2009 audits and a 2010 budget, this is a concern.
The Negative Outlook reflects the possibility of a restrained capacity to meet financial commitments if CPA's business profile and CNMI's economic environment continue to be unfavorable. The overall economy of the CNMI is in decline and will likely take several years for seaport operations to be adequately sized for a more stabilized economy. As CNMI is a commonwealth of the United States, U.S. federal law and regulation, such as minimum wage law requirements, immigration restrictions, and environmental regulation all have an impact on the island's economy. While CPA has historically exhibited strong cash flows and a healthy balance sheet, the port's ability to return to its historical financial strength will require a sustained increase in wharfage rates which will undoubtedly have a dampening effect on demand and will increase the cost of goods across the islands. The U.S planned relocation of approximately 8,000 military personnel and their dependents from Okinawa, Japan to Guam by 2014 is expected to boost Guam's economy and could lead to migration from the CNMI.
CPA's continued financial weakness resulted in a 0.76 times (x) debt service coverage ratio for 2008 recovering in 2009 at 1.30x and budgeted to be at 1.20x in 2010. Cash balances remain adequate but have weakened with days-cash-on-hand falling to 154 days in 2009 from 537 days in 2007. Harbor generated revenue for fiscal 2009 grew by 25.2% to 4.4 million due to the upward revision of wharfage rates whereas non-harbor revenue merely grew by 1%. CPA's total operating revenue improved by 17.5% in 2009 to 6 million from 5.1 million just the year before. Cost cutting measures resulted in a decrease of 27.3% in expenses over 2008.
CPA will continue to feel the effects of a weakening CNMI economy and will remain vulnerable to operational and financial shocks, including the island's economic volatility, weather events (such as typhoons), and U.S. federal government policy. These risks, coupled with CPA's limited rate making flexibility will most likely further strain CPA's operations and squeeze cash balances in the medium term.
The CPA owns and operates three seaports in the CNMI, the largest of which is the Port of Saipan. The commonwealth consists of a chain of 14 islands of which four are inhabited. The islands are located in the North Pacific Ocean, approximately 1,458 miles southeast of Tokyo, Japan and 5,969 miles west of Los Angeles.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:
--'Rating Criteria for Infrastructure and Project Finance' (Sept. 29, 2009);
--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' (March 12, 2007.
Additional information is available at 'www.fitchratings.com'.
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Michael M. Murad, 212-908-0757
Michael
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or
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Email: cindy.stoller@fitchratings.com