TEXT - Fitch affirms Florida's Port of Palm Beach District
Nov 27 - Fitch Ratings affirms its 'BBB-' rating on the Port of Palm Beach District's (the district, or the port) approximately $38.2 million in outstanding revenue bonds. The Rating Outlook is revised to Stable from Negative. The Outlook revision reflects stabilization of the port's top operating lines and the expected sustainable recovery in the revenue base after considerable volatility in the most recent recession. In Fitch's view, the projected revenue growth from increasing cruise activity in conjunction with minimum lease payments from newly signed and existing tenants will adequately support the financial obligations of the port going forward. In addition, adequate liquidity enhances the port's overall financial flexibility and its ability to maintain debt service coverage at minimum coverage requirements. KEY RATING DRIVERS: VOLATILITY IN OPERATIONS AND STRONG COMPETITION: The port's elevated risk profile and significant dependency on regional demand and discretionary income, which are strongly correlated to economic cycles, coupled with the highly competitive South Florida port environment, remain a concern. The port's continued financial recovery is highly dependent on cruise activity from Bahamas Celebration and a new one-day cruise operator, Black Diamond Casino Inc. NARROW OPERATING BASE: The port's narrow revenue base has been under pressure in the recent years. While total operating revenues increased by over 20% in fiscal year (FY) 2012 (ended Sept. 30) to $14.3 million, sustainable positive revenue generation still remains uncertain. Moderate diversity exists among rental, cargo and cruise related revenue streams, with overall base rental income providing approximately 29% of total operating revenue. Long-term leases partially offset volatility associated with cargo and cruise operations; however, the port is highly reliant on its two largest revenue generating contracts with Bahamas Celebration and Tropical Shipping which generate a combined 53% of operating revenues. Additional uncertainly exists regarding Tropical Shipping's long-term lease agreement that expires in FY2013; however, port management expects the agreement to be extended. MODEST CAPITAL PLAN: Management has identified approximately $45.1 million in potential capital improvement projects through FY2017, of which approximately $27 million is expected to be grant funded and the remaining costs financed with internally generated funds. CONSERVATIVE DEBT STRUCTURE: All fixed-rate debt with a level debt service profile and 14-year tenor. MODERATE LEVERAGE AND ADEQUATE LIQUIDITY: Debt service coverage improved in FY2012 compared to the prior year (at 1.65x vs. 1.13x on net revenue basis), reflecting some cushion against further deterioration. The district's moderate levels of financial leverage with no additional near-term debt plans (net debt/cash flows available for debt service at 3.5x) in conjunction with adequate unrestricted cash and investments (with over 400 days of cash on hand) provide for some additional financial flexibility. WHAT COULD TRIGGER A RATING ACTION: --Maintenance of the current rating will depend upon sustained gains and/or stability in top line revenue growth, and management's ability to control expenses and comfortably meet its 1.10x net revenue rate covenants from operational cash flow, while maintaining adequate liquidity levels. -- To the extent that the port is unable to extend and/or replace its long-term agreements with its largest customers, including Tropical Shipping, downward rating pressure would likely be warranted. --Material loss of cargo and cruise activity would likely lead to negative credit rating action given the port's narrow operating base. SECURITY: The revenue bonds are secured by a pledge of gross port operating revenues. CREDIT UPDATE: The port's revenue base weakened and exhibited substantial volatility in the years between FY2006 and FY2011, declining at a 1.7% compounded annual growth rate (CAGR). Cruise revenues stabilized over the last two years with the addition of a multi-day cruise line, Bahamas Celebration, which signed a five-year lease with the port in March 2010. The port's cruise passenger figures and parking income continued to increase in FY2012 from the prior year, with total operating revenues up by approximately 20% from FY2011 revenues. The growth in operating revenues is also attributed to increases in shipments of break-bulk and increased container tonnage, as well as larger sugar throughput (the port's largest commodity). The increase in cargo volume was somewhat offset by declines in fuel triggered by renovations at a nearby power plant (the largest fuel oil recipient). The port's FY2013 budget assumes increased cruise activity from the new day-cruise operator, Black Diamond Casino, which began servicing the port earlier this month with a five-year lease. Cruise income at the port accounts for approximately 13% of operating revenue but also generates significant parking revenues (7% of operating revenues). Fitch views the significant competition from other nearby ports for cruise passengers combined with the narrower type of cruising offered at the port as constraining any meaningful and predictable growth in this business line. In addition, the district budgeted increases in base rent that the port receives under its long-term leases and the associated minimum required payments. These include overall step-up increases in minimum annual guarantees as well as additional revenues from the port's new tenant, Stonerock Shipping Corporation, which will operate metal logistics and shipping services out of the port. In light of revenue declines through FY2011, operating and maintenance expenses were reduced at3.9% CAGR between FY2006 and FY2011. Expenses increased by approximately 2.1% in FY2012, below the budgeted increase of 3.4% for the year, reflecting higher healthcare costs and other marginal cost increases. The FY2013 budgeted 6.5% increase reflects expected security cost increases associated with additional cruise activity, as well a substantial increase in business development spending. Debt service coverage ratio (DSCR) levels (on net revenue basis) improved in FY2012 at 1.65x when compared to FY2010 and FY2011 net coverage of 1.13x. This is consistent with the port's expectations for the year. Management expects to generate sufficient net revenues to provide 1.92x DSCR in FY2013 as a result of anticipated increases in cruise and cargo related activities. Fitch expects revenue growth in FY2013 recognizing the port's assumed increases in cruise activity from a new one-day gambling cruise (to backfill the previous Palm Beach Princess vessel) and stabilization and possibly slow growth in the medium term as cargo and bulk volumes recover from depressed levels, reflective of the region's economic growth. To the extent that the port is unable to extend/replace its long-term agreement with its largest customer, Tropical Shipping, and fails to maintain long-term relationships with its largest revenues producing tenants, downward rating pressure would likely be warranted. Fitch notes the availability of approximately $20.5 million in unrestricted cash and unencumbered capital and maintenance reserves available for annual debt service and/or operating expense provides the port with some cushion to deal with weather events or other short-term interruptions in service. The port's current capital plan does not include any future debt issuances and centers on rehabilitation of Slip 3. Approximately $6 million of total project costs will be funded with the ports unrestricted cash and capital improvements reserves, but management plans to maintain about $7 million in unrestricted cash going forward. Palm Beach operates as a landlord-tenant port, entering long-term leases with various shipping and terminal companies for waterfront property and facilities. In addition to the base rent the port receives under these leases, the port also levies cargo-based tariffs for ship docking, cargo transit, and other port activities.