Fitch Ratings has affirmed the 'A' rating on approximately $64.3 million of Canaveral Port Authority (CPA) port revenue bonds, series 2016 C&D. The Rating Outlook is Stable.
KEY RATING DRIVERS
Cruises Anchor Port Operations - Revenue Risk (Volume): Midrange
Central Florida's tourism market, especially Orlando, drives the Port's Disney, Royal Caribbean, Carnival, and Norwegian cruise traffic, which generates over 75% of port operating revenue. The cruise business has remained resilient during weak economic cycles and declining discretionary spending, and Canaveral's cruise revenues continued to grow through the recent recession. Cargo operations account for the majority of the Port's remaining revenue, and provide diversification away from cruise for a small but growing portion of the Port's revenues.
Contracts Mitigate Cruise Exposure - Revenue Risk (Price): Midrange
While the Port remains exposed to the discretionary cruise business, contracts with key cruise lines help to insulate revenue from volume fluctuations. Cruise guarantees accounted for approximately 46% of total operating revenue in 2017. Staggered contract expirations limit some exposure to renewal of operating agreements; however, renewal risk remains as contracts expire prior to the maturity of the current outstanding debt. Cargo commodity business lines complement cruise activities but are more volatile due to their volume dependency.
Developing, Flexible Capital Program - Infrastructure Development/Renewal: Midrange
The approximately $378.5 million fiscal year 2018 through fiscal 2022 capital improvement program (CIP) is robust, yet remains flexible, with the ability to adjust scale and timing of projects as warranted by demand. Larger near-term projects include a focus on cargo operations, along with the potential to expand cruise terminals and operations. The capital plan is expected to be funded from state and federal grants and excess cash flow, with the exception of the cruise terminal expansion, which will only move forward with cruise operator support. The Port will only move forward with the new cruise terminal if a long-term contract is in place with the cruise operator and includes sufficient minimum annual guarantees (MAGs).
Conservative Debt Structure - Debt Structure: Stronger
The Port's capital structure includes long-term, fixed-rate revenue bonds that mature in various stages, with final maturity in 2046. 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 fiscal 2029. A sizable bond issuance may take place by calendar year end if the Port moves forward with the cruise terminal construction, but contracted revenues are expected to offset the additional debt service.
Financial Profile
The Port's debt service coverage ratio (DSCR) remained strong in 2017 at approximately 2.2x, despite an increase in debt service related to the 2015 and 2016 bond issuances. Leverage as calculated by net debt-to-cash flow available for debt service (CFADS) including draws on the line of credit, remained relatively flat at 5.1x at fiscal year-end 2017, compared with 4.9x at fiscal year-end 2016. Under Fitch's rating case, leverage is expected to decrease to approximately 4.0x at fiscal year-end 2022, assuming no additional debt, and DSCR will average 1.9x. Fitch views these metrics as comparable with the 'A' rating.
PEER GROUP
CPA's peers include other Florida east coast ports such as Broward County (A/Positive) and Miami-Dade County (A/Stable), which serve similar markets and have sizable cruise operations that compete with the Port. Both peer ports have a larger cargo presence and as such, less exposure to a single business line. However, PortMiami has higher leverage of over 8x as it progresses through its CIP, and Broward's leverage will become more comparable to CPA as it completes its near-term borrowing plan. CPA's total DSCR of 2.2x is relatively in line with Broward County and stronger than PortMiami.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- Changes in cost structure, scope of the capital plan, declines in passenger traffic, and/or weakened lease renewal trends, resulting in leverage above 7.0x and/or DSCR below 1.7x on a sustained basis.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
- Due to the uncertainty around future debt issuances as CPA progresses through its capital program, along with the Port's elevated cruise industry exposure, a positive rating action is unlikely at this time.
CREDIT UPDATE
Performance Update
CPA's cruise traffic continues to remain strong and drives the Port's stable operating profile. Passenger volume increased approximately 7% in fiscal 2017 to 4.5 million, and is up an additional 1% through the first three months of fiscal 2018. Volume growth stemmed from new service offerings and additional ship capacity. Fitch believes CPA is well-positioned for continued cruise passenger growth, though remains susceptible to declines in discretionary income affecting passenger demand.
The Port's processed cargo diversifies a small, but growing portion of CPA's total operation. Processed tonnage increased 9% in fiscal 2017, and is up an additional 3% through the first three months of fiscal 2018. Increases were driven by a surge in imports and continued strong construction activity in Central Florida providing solid growth in lumber, slag, limestone and granite shipping. Processed petroleum also contributed to CPA's tonnage growth, and remains a substantial portion of shipping activity as the Port supplies fuel to four international airports - Orlando, Orlando Sanford, Melbourne and Daytona Beach. While cargo shipping remains volatile, Fitch believes CPA's tonnage levels are well positioned for additional growth as the Port completes new portions of its CIP. Also, the Port's minimum annual guarantees, which totaled $49.1 million (50% of total revenue) in fiscal 2017, offset some exposure to volatile commodities shipping and the discretionary nature of the cruise industry.
Total fiscal 2017 operating revenue increased 9% to $93.3 million, driven by parking and wharfage growth, both from higher rates of ship calls and revenue passengers. Operating expenses (net of depreciation) grew 18% to $46.4 million due to an increase in facilities, public safety, and administrative expenses as additional portions of the CIP were completed and the Port's operations increased. Debt service coverage remained strong at 2.2x in 2017, but leverage increased to a Fitch-calculated 5.1x. Both metrics remain in line with peers in the 'A' category. Fitch expects CPA's financial metrics to continue to remain strong with any additional leverage in 2018 through 2022 to be offset by continued growth in cruise and passenger revenue.
CPA's five-year capital plan (fiscal 2018-2022) totals $378.5 million and has a cargo focus, as CPA continues to capitalize on its available capacity relative to nearby, competing ports. This 5-year CIP is approximately $30 million less than the CIP presented during last year's review due to the completion of many large projects including the completion of Cruise Terminal 10 improvements and some harbor widening/deepening work. Included in the CIP is the construction of a new cruise terminal, which the CPA anticipates issuing approximately $150 million in bonds later this year to fund. This project will only move forward if sufficient MAGs are in place and under a long-term contract. The exact amount, timing, and structure of the transaction are still being finalized. However, the majority of funding for the CIP is expected to come from state and federal sources and excess cash flow. Fitch views positively the involvement from cruise partners in past capital developments at the Port, namely the development of Cruise Terminal 8 and Cruise Terminal 1. The Port has demonstrated a favorable track record of project delivery with no material cost overruns to date, and projects remain generally flexible in the event of lower than expected cash flow.
Fitch Cases
Fitch's base case is generally modeled on forecasts provided by the sponsor for 2018-2022, with the exception of cargo revenues, which are tempered slightly from the sponsor case. Base case cruise revenues grow at a flat 3% from 2019-2022 while cargo revenues grow at 5% from 2019-2020 and then at an inflationary 2% for 2021-2022. The 2017-2022 CAGR for cruise related revenues is 4% and roughly 3% for cargo related revenue, driven by increases in the Port's tariffs, CIP completion and increased ship activity. The CAGR for other operating revenue (land leases, parks, camping and recreational, commercial vehicle, event, operating grants, and miscellaneous) is 4.5%, resulting in a total operating revenue CAGR of 3.9%. Expense growth at an approximately 2% CAGR provides the Port with an average coverage level of 2.3x through 2022. Leverage declines to the mid 3x range by 2022 as the Port's current debt amortizes, and CPA builds its liquidity balance. It is assumed the Port's LOC balance will remain outstanding with some pay down.
Fitch's rating case contemplates debt service coverage levels under a scenario of economic decline. The rating case assumes flat annual growth for both cruise revenue and cargo revenue at 1.6% and 0.6%, respectively, along with flat annual expense growth at 2.5%, which results in average coverage levels falling to 1.9x and leverage remaining at 4x by 2022. The Port retains flexibility in its capital program depending on demand and the timing of grant funding; however, both the Fitch base and rating cases do not include additional debt as timing and size of future issuances are uncertain at this time. Metrics in the rating case remain consistent with the other 'A' rated Ports in their respective rating case profiles.
