Fitch Affirms Miami-Dade County, FL’s Seaport Revs at ‘A’; Outlook Stable

posted by AJOT | Jun 23 2017 at 08:25 AM | Ports & Terminals

Fitch Ratings has affirmed the 'A' rating on Miami-Dade County (the county), Florida's $570 million of outstanding seaport revenue bonds. The revenue bonds are secured by net revenues from the county's seaport department, PortMiami (the port). The Rating Outlook on all bonds is Stable. KEY RATING DRIVERS Summary: The rating reflects PortMiami's leading market position evidenced by its ranking as the largest cruise port in the world and one of the largest cargo ports in the state of Florida. The rating also reflects the port's sizeable minimum annual guaranteed revenues (MAGs), which serve to mitigate potential revenue volatility from competition and economic cycles, coupled with adequate total coverage ratios. However, these strengths are moderated by the port's higher than average leverage compared to peers and the potential for sizable future borrowings. Leading Position, Robust Competition (Revenue Risk - Volume: Midrange): PortMiami, a global secondary port of call in terms of cargo and leading cruise port, benefits from stable revenue streams derived from diversified business lines (with cruise operations and cargo representing approximately 48% and 23% of total revenues respectively). In addition, the port's recently completed Miami Harbor Project which deepened and widened the harbor to accommodate post-panamax ships, added onsite rail and also a truck tunnel that provides direct access between the port and the highway strengthened this market condition and provides additional multimodal capability. Port volumes have some exposure to fluctuations in the cruise business and to the competitive port environment in South Florida and the south eastern seaboard overall. Guarantees Stabilize Revenues (Revenue Risk - Price: Stronger): The port benefits from long-term guaranteed contracts with key cruise customers and long-term leases with cargo operators, with minimum guarantees covering approximately 77% of fiscal 2016 operating revenues. Minimum guarantees are expected to cover a substantial 70% to 80% of operating revenues in the medium term, which help to insulate revenues and financial metrics from the port's exposure to volume fluctuations. Manageable Capital Program (Infrastructure and Renewal Risk: Midrange): The port completed its sizable $1 billion Miami Harbor Project in 2015. A primary focus of the CIP was completion of the deep draft shipping channel to allow larger, post-Panamax ships access to the port, which opened for operation in September 2015. The port's current CIP through fiscal 2021 (year-end Sept. 30) is budgeted at a more manageable level and approximately 60% of the forward CIP is expected to be debt funded, with the remainder to come from grants and tenant contributions. Variable Rate Exposure, Strong Covenants (Debt Structure: Midrange): The revenue bonds are fully amortizing, senior lien debt, supported by very strong structural features such as a MADS based rate covenant and additional bonds test. However, these strengths are tempered by the port's potential exposure to debt interest exposure over time with approximately 30% of outstanding senior lien debt unhedged variable rate bonds and the port's potential sizable debt issuance to support its capital plan. The port is also responsible for payments on the county's seaport general obligation (GO) bonds, which are on parity with the revenue bonds, and the subordinate sunshine state loan payable and capital asset acquisition bonds. While all debt is expected to be repaid by the port's net revenues, all debt besides the seaport revenue bonds are issued through the county and are non-recourse to the port. Moderate Financial Profile: The port's financial profile has historically generated robust coverage levels above 3.0x for revenue bonds and 1.6x or higher for revenue and GO bonds combined. However, given the port's escalating debt service profile, coverage levels have softened somewhat in fiscal years 2015 and 2016 but still remain supportive of the rating category, with a revenue bond debt service coverage ratio (DSCR) of 2.5x and combined revenue bond and GO DSCR of 1.9x. Leverage is somewhat high at 7.1x for revenue and GO bonds, though these levels may continue to rise given the port's plans for additional debt. Peers: Comparable ports include other Florida ports such as Port Everglades ('A'/Outlook Positive) and Canaveral Port Authority ('A'/Outlook Stable), which serve similar markets and compete with Miami for cargo and cruise business. PortMiami maintains the largest market share of cruise passengers between the three, while PortMiami and Port Everglades are relatively evenly matched in regards to TEU volumes. PortMiami's leverage is relatively high compared to peers, but leverage is expected to migrate towards levels seen at other Florida ports within five years, not including PortMiami's additional bond issuance. With anticipated additional debt issuances, PortMiami's leverage will remain at its current level, if not migrate upwards. However, the port is able to shoulder a larger debt profile at this rating level, compared to peers, given its size and market cache. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:

Additional future borrowings increase leverage above 9.5x for a sustained period, without corresponding increases to net revenues;
Decreased project revenues without corresponding management of expenses or an increase in debt service, resulting in senior lien coverage levels below 1.6x.

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: Should the capital plan be successfully executed and leverage levels decrease and be maintained below 4.0x as new revenue streams come online, upward rating migration is possible. SUMMARY OF CREDIT Performance Update PortMiami's operating revenues continued their trend of strong growth, increasing 5.7% to $144 million in fiscal 2016, its fourth consecutive year of growth. The increase was attributable to tariff and contract rate increases for cruise ships, an increase in cruise passengers and increased cargo activity. For year-to-date volume performance through March 2017, cargo volume is somewhat down, while multi-day cruise passengers are experiencing strong growth. TEUs through March 2017 are approximately 1.7% lower than year-to-date March 2016, due to a shipping line moving from PortMiami to Port Everglades. Multi-day cruise passengers through March 31, 2017 totalled over 3 million, an increase of almost 11% as compared to the same period in 2016. The port's DSCR has historically been strong with levels above 3.0x for revenue bonds and 1.6x or higher for revenue and GO bonds combined. Given the port's escalating debt service profile, coverage levels have softened somewhat in recent years as compared to historic levels but still remain supportive of the rating category. The fiscal 2016 DSCR for revenue bonds only was 2.5x and the DSCR for combined revenue and GO bonds was 1.9x. Resort World Bimini SuperFast, which was a casino passenger service between the port and a casino in Bimini, Bahamas, entered into a termination of agreement with PortMiami. The company had suspended passenger service in fiscal 2016 and decided to terminate service and its contract in fiscal 2017 due to less passenger usage than expected and higher than anticipated costs for Bimini, from an inefficient ship purchase. The termination required a $20 million payment plus contractual amounts due through March 15, 2017. The payment is expected to be received by July 31, 2017 and the port expects to retain the payment in its unrestricted reserves through at least fiscal year-end 2018. Bimini accounted for MAGs of approximately $7 million per year through the forecast period, or 10% of cruise revenues and 5% of total operating revenues. Contractual guarantees continue to provide a solid anchor for performance at the port, with fiscal 2016 minimum annual guarantees (MAGs) of $111 million equalling roughly 77% of the year's operating revenues. Cruise agreements provide PortMiami with annual guaranteed passenger volumes and revenues while providing the cruise lines with incentives for meeting guaranteed levels. PortMiami is guaranteed between $59 million and $91 million in cruise revenues per year through fiscal 2021, with 3% escalation built into the contracts. While 15 cruise brands operate out of PortMiami, three major cruise companies (Carnival, Norwegian Cruise Line and Royal Caribbean Cruise Line) provide roughly 81% of cruise revenues. Cargo revenues are also protected through minimum guarantees. PortMiami is a landlord port, with containerized cargo activity handled by three individual terminal operators that occupy approximately 240 acres: Seaboard Marine (Seaboard), South Florida Container Terminal/Terminal Link (SFCT) and the Port of Miami Terminal Operating Company (POMTOC). Total cargo MAGs was $48 million for fiscal 2016, which will rise steadily to $60 million in fiscal 2021. The port is also aided by the pledge of certain State Comprehensive Enhanced Transportation System Tax revenues, which will be appropriated from the Florida Department of Transportation (FDOT) starting in fiscal 2017. The port will receive $4 mil in fiscal 2017, $12.5 mil in fiscal 2018 and $17 mil per annum in fiscal 2019 through 2042. These monies are gas tax revenues to be appropriated from FDOT to the port in order to reimburse the port's fiscal 2014 $203.1 million contribution for the Port Miami Tunnel Project. Payments are sized to equal an NPV of approximately $228 million, based on a 5% discount rate. Fitch Cases Fitch's base case uses budgeted fiscal 2017 data to project its first year, with expected growth in cruise revenues and container crane fees somewhat tempered as compared to budgeted numbers. Thereafter, revenues and expenses are based on management's conservative expectations of future performance, as well as Fitch's own growth assumptions. Unrestricted funds at fiscal yearend 2017 were increased by the $20 million termination payment from Bimini and held at this level through fiscal yearend 2018, then slowly decreased by approximately $10 million per annum through the forecast period. Given these factors, total revenues are expected to grow at a CAGR of 6.9%, while expenses grow at a 5% CAGR. This produced an average DSCR of 2.2x on combined revenue and GO bond debt service and, including an anticipated debt issuance of $355 million, average DSCR was 1.8x. Leverage reaches a maximum of 7.7x at fiscal yearend 2020, including new revenue bond issuance. Without the new issuance, leverage slowly declines to 4.3x at fiscal yearend 2021. Fitch's rating case contemplates the blended effect over five years of a 10% drop in cruise revenue coupled with a 6% drop in cargo wharfage/dockage revenues and 3% drop in container crane fees, followed by a slow revenue recovery. Over the five-year forecast period this represents average annual revenue growth of 2.7%, coupled with expenses growing at a 5.2% CAGR. Unrestricted funds mirrored the base case. The Rating Case assumes a lesser debt issuance, as compared to the Base Case. Port management indicated a number of projects in the capital plan could be delayed under a downside scenario and debt issuance could accordingly be lowered. Debt issuance was decreased approximately 34%, to $235 million. This scenario produced a narrower average senior DSCR of 1.7x, and higher average leverage of 7.7x, reaching 9.7x at fiscal yearend 2021 when including anticipated additional debt.