USA: Fitch Affirms ‘A’ Rating on Florida’s Port Facility Revenues
Fitch Ratings affirms the ‘A’ rating on Broward County, Florida’s outstanding $249 million port facilities senior revenue and refunding bonds.
All senior bonds are secured by net revenues from Port Everglades (the port). The Rating Outlook on all senior bonds is Stable.
KEY RATING DRIVERS
DIVERSIFIED REVENUES, PRIMARILY LOCAL CARGO MARKET: The port benefits from diversified revenue streams from various business lines (cruise operations, container traffic, petroleum distribution, and real estate/warehousing). The port’s primarily local/regional cargo market limits its exposure to global trade fluctuation compared to peers. However, the port does have some exposure to fluctuations in the cruise business and to the competitive port environment in South Florida and on the east coast.
CRUISE MARKET EXPOSURE MITIGATED BY CONTRACTS: The port has some exposure to fluctuations in the discretionary cruise business, though this is largely mitigated by the existence of long-term guaranteed contracts with key cruise customers, accounting for 39% of 2011 operating revenues.
SIZABLE CAPITAL PROGRAM: The port’s sizable yet flexible fiscal year (FY) 2013 – FY2017 capital improvement plan (CIP) totals $546 million in project costs, with 34% expected to be funded with bonds. The port benefits from $90 million in expected state grants for several projects in the CIP.
FIXED RATE DEBT: The port’s debt is fixed rate, with the majority on the senior lien. Debt is of relatively short tenor, with final maturity in 2029.
STRONG FINANCIAL PROFILE: The port’s strong financial profile generates comfortable coverage levels above 2.0x and allows the port to build its liquidity position (currently over 1,100 days cash on hand). Leverage is notably low at 1.1x net debt to cash flow available for debt service (CFADS), but could trend upwards as the port undergoes its capital program which relies on both debt and internal funding.
WHAT COULD TRIGGER A RATING ACTION
Management’s ability to maintain sound coverage and liquidity levels in light of expected increases in annual debt service requirements due in part to CIP commitments.
Proceeding with the full borrowing component of the CIP should expected growth not materialize.
The revenue bonds are secured by a lien on, and pledge of, the net revenues derived from the operation of the port facilities and the moneys on deposit in specific funds and accounts established by and outlined in the resolution.
Historically, operating margins have been relatively stable at the port. After dropping 5.6% in 2009, operating revenues rebounded 8.9% in fiscal 2010, and a further 11.7% in 2011. Overall, operating revenues have increased at an annual growth rate of 5.3% since 2006. Based on preliminary results for fiscal 2012, revenues are up 2.7% over the prior year. Increases in 2010 and 2011 reflect increasing cruise revenues from introduction of Royal Caribbean’s Oasis class cruise vessels in fiscal 2010. Recent contract renewals with Royal Caribbean and Carnival include minimum guarantees that cover 93% of total cruise revenues and 38% of total operating revenues, providing stability to the cruise revenue base. These guarantees partially mitigate exposure to the discretionary nature of cruise activity, although the port remains vulnerable long term to the cyclical nature of the cruise industry and competition from other nearby ports. In fiscal 2011, cruise revenues accounted for 41% of total operating revenues, container revenues 23%, petroleum revenues 18%, and the balance (bulk, real estate, and other revenues) 18%.
Operating expenses before depreciation have been contained over recent years, increasing 0.2% in 2009, 1% in 2010, and 0.3% in 2011. This is a change from previous periods, when expense growth ranged from 5% to 15%. Preliminary results indicate operating expenses dropped 3.3% in 2012 compared to the previous year. However, given the timing of several capital projects coming online in 2013 and 2014, the budget indicates expenses are likely to increase in the next few years. Given the port’s increased annual debt service through 2016 and higher CIP commitments in coming years, it will be important for management to continue to control its expense profile going forward.
Debt service requirements stepped up in 2010 to $29 million from $22 million the year prior, and as a result debt service coverage levels were lower at 1.77 times (x) senior / 1.59x all-in. Prior to 2010, robust annual financial results and stable debt service resulted in debt service coverage consistently above 2.0x on the senior lien and above 1.7x on an all-in basis since 2004. Coverage in 2011 was in-line with historical levels at 2.33x senior / 2.09x all-in. Looking forward, senior coverage is expected to migrate to the 1.5x range as a result of the increased CIP and higher annual debt service through 2016. Lower coverage levels are in part mitigated by the port’s solid liquidity position and relatively secure agreements with many of the port’s tenants. The port has maintained strong cash and investment balances in recent years equaling over 1,100 days cash on hand ($206 million cash and investments in fiscal 2011, $237 million as of August 2012) while paying for capital improvements. Fund balances are expected to be maintained, although the port intends to use some of these funds for pay-go capital investments.
The port’s 2013 – 2017 CIP is $546 million, higher than last year’s plan. This program incorporates cruise terminal expansions, improved intermodal connectivity, adding more berth space, and a dredging program to accommodate larger vessels. Primary funding sources for the CIP include a combination of internal funding/port fund balances (50%), potential future bond proceeds (34%), and potential future grants (16%). The port has benefited from the State of Florida’s focus on strategic port development projects, with $90 million of potential state grant funding for projects in the current CIP. The plan is flexible, and the size and timing of future debt issuances may vary depending on whether projects move forward as scheduled.
Press Release, October 23, 2012