Fitch Ratings has upgraded the North Carolina State Ports Authority's (NCSPA) $38.2 million senior lien port facilities revenue bonds, series 2010A&B to 'A-' from 'BBB+'. The Rating Outlook is revised to Stable from Positive.
The upgrade reflects the port's sustainable robust financial metrics, in addition to operating resiliency as evidenced by a quick and full recovery after the loss of its largest customer, and diversification in carriers and volume. Moreover, the increase in state appropriations and the flexibility to use such funds for capital or debt expenditures provides considerable financial cushion in the coming years.
The rating reflects the authority's strong financial profile and coverage metrics, which provides some protection from revenue and volume fluctuations due to the authority's exposure to economic cycles and changes in demand, given the operating nature of the port and the commodity heavy cargo mix. The authority's growth strategy and the addition of new shipping lines has helped to diversify cargo and shipping lines, while also increasing throughput volume, a trend that is expected to continue over the near term. Additionally, the authority benefits from a capital plan that is majority funded from state appropriations and focuses on continued modernization and accommodations for post-Panamax ships now that the turning basin expansion project is completed.
Regional Port Seeking Diversification - Revenue Risk (Volume): Midrange, revised from Weaker
The port system primarily serves a limited regional base and has some volatility in throughput through economic cycles and changes in tenants. However, volumes have shown resilience in recent years, highlighted by the port's ability to relatively quickly fill the lost volume after the loss of its largest shipping line, Hanjin Shipping Co. Ltd, to bankruptcy. The addition of new shipping lines has helped to diversify trading partners and cargo, though there is a reliance on bulk cargo with some concentration in wood/forest- and phosphate-based cargo. Exposure to the extremely competitive southern Atlantic port environment, of which the North Carolina ports have a relatively small market share, remains a concern.
Fluctuating Cash Flows, Some Protection - Revenue Risk (Price): Midrange
The port system remains exposed to cash flow volatility associated with economic cycles and fluctuations in commodity prices and global demand, given the port's status as an operating port with moderate levels of contractually obligated payments (approximately 25% of revenues in fiscal 2017). However, Fitch takes comfort in the authority's long operating history and strong operating margins and coverage levels, which are expected to be maintained over the medium term even with minimal growth.
State-funded Capital Plan - Infrastructure Development & Renewal: Stronger
The current five-year capital program is relatively modest at $265 million. The capital plan is primarily funded through state appropriations, which will support the majority of the plan over the next three years and at least 50% of the plan through 2022. If state appropriations remain in place through 2022, over 80% of the capital plan would be supported by appropriations. The recent expansion of the turning basin is complete, making the port post-Panamax ship ready. The capital program focuses on upgrading and modernizing the ports to continue to efficiently accommodate post-panamax ships, including berth reconstruction and crane additions and upgrades.
Moderate Debt Structure - Debt Structure: Midrange
The authority has a stable amortizing debt structure, with some variable rate exposure. The rated series 2010A&B bonds are fixed rate with no refinancing risk and a level amortization profile. The debt service reserve fund is fully cash-funded. Covenants are adequate, with a senior rate covenant of 1.35x and an all-in covenant of 1.05x.
Financial Profile
The authority has a history of somewhat volatile but satisfactory operating and financial performance, with senior lien debt service coverage ratios (DSCRs) of 3.1x or better in recent years and 3.9x DSCR in fiscal 2017. All-in coverage, which includes senior and subordinate bonds along with capital leases and other debt, is also sufficient at 2.0x in fiscal 2017. Leverage, as calculated by net debt levels including senior and subordinate bonds and capital leases to cash flow, is moderate at 3.5x at fiscal year-end 2017. Leverage is expected to increase somewhat at fiscal year-end 2018, due to an increase in capital leases, but remain in line with the rating category. Liquidity is strong at 446 days cash on hand.
PEER GROUP
Alabama State Ports Authority (A-/Negative) and Jacksonville Port Authority (A/Stable) are the two closest peers to NCSPA. Alabama State Ports Authority is similarly a state-owned operator port located in the southeast section of the country. Jacksonville is similar in that both are midsized ports exposed to strong regional competition, but Jacksonville is a landlord port and benefits from ample Minimum Annual Guarantees. In terms of metrics, NCSPA has somewhat higher all-in DSCR than both ports and lower leverage.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- Operational volatility on an ongoing basis that creates substantial fluctuations in financial performance would be a concern, even with strong coverage levels.
- Material changes to state funding which leads to higher than expected borrowings and overall leverage
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
- Positive rating action is unlikely at this time given the inherent volatility in throughput and metrics as an operating port. However, Fitch views NCSPA's ability to continue to maintain strong coverage levels as essential to supporting the current rating.
CREDIT UPDATE
Financial performance softened slightly in fiscal 2017, due to the loss in volume associated with the Sept 2016 (fiscal 2017) Hanjin bankruptcy. Revenues were down 7.4% in fiscal 2017 as compared to fiscal 2016. Favorably, management has made a concerted effort to decrease operating expenses, starting in December 2016 (freezing open positions, tracking overtime, delaying some repair work), which resulted in a 4.6% decrease in fiscal 2017 operating expenses, much lower than anticipated. Due to cost management, cash flow available for debt service (CFADS) in fiscal 2017 was $12.2 million resulting in senior DSCR of 3.9x and all-in DSCR of 2.0x, as compared to fiscal 2016's CFADS of $12.3 million and senior DSCR of 4.0x and all-in DSCR of 1.7x.
The Hanjin service, which accounted for approximately 35% of fiscal 2016's container tons and 65% of container tons including the remaining CKYHE Alliance, declared insolvency and filed for bankruptcy in September 2016. At the time of bankruptcy, the port had approximately $813,000 in Hanjin receivables, which was fully reserved as a bad debt expense. Approximately 1,500 boxes remained at the terminal, which were taken over by leasing companies and moved off the yard. Favorably, the receivables and other costs associated with the Hanjin bankruptcy were almost completely offset with lease box revenues and settlements.
Revenues are up approximately 1.1% through YTD 2018 (six months ended December 2017), compared to the same period in fiscal 2017. Management forecasts full fiscal 2018 revenues of $48 million, an increase of 13% driven by the addition of five shipping lines, intermodal rail service, growth in wood pellet volumes from the recently opened Enviva terminal and growth in organic grains. As compared to fiscal 2016 revenues before the Hanjin bankruptcy, forecasted revenues of $48 million would be a 4.8% increase. Expenses for YTD 2018 have decreased 14.2% compared to YTD 2017, due to continued cost containment measures. Management expects future expenses to remain stable through the near term, with the potential to increase in line with inflation.
The authority's overall total cargo volumes (including both ports) had largely been trending upwards since the recession, with a CAGR of 2.4% from fiscal 2010 to fiscal 2016. However, due to the impact of the Hanjin bankruptcy, total tonnage fell 12.1% in fiscal 2017 as compared to 2016, resulting in a CAGR of 0.5% from fiscal 2010. Fertilizer throughput was down for the year, however, these amounts include volume handled by PSC Phosphate, which is an independent operator located at the port and its volume amounts are not directly tied to revenues. YTD 2018 (six months ended Dec 2017) bulk and breakbulk volumes are up approximately 9.4% and TEUs are up 24%. Volume growth is primarily driven by the addition of new shipping lines, indicating a full recovery post-Hanjin. Management expects continued growth in volume through fiscal 2018 and thereafter driven by Enviva wood pellet operations in Wilmington and organic grain business in Morehead City.
The authority's capital plan totals $265 million over the next five years, which is an increase from last year's CIP of $175 million. The authority increased its CIP after state appropriations were approved through June 30, 2019 and increased by $10 million per annum. The $45 million appropriation is recurring and would need an action to remove or modify, otherwise it remains in place. The capital plan focuses on upgrading and modernizing the ports to continue to accommodate post-panamax ships that have begun to arrive at the port. The port entered into a new capital lease totalling $63 million, which includes $27 mil of refinancing and $36 mil of new money to finance three new cranes. The refinancing was to refund the port's existing capital lease that had a bullet payment and smooth out debt service. The five-year CIP should be completed without any additional debt.
Fitch Cases
The Base Case takes into account YTD 2018 performance and annualizes YTD revenue, resulting in fiscal 2018 revenue of $48.7 million, in line with management's expectations for the year. Expenses were decreased 4.9% for fiscal 2018, as compared to fiscal 2017. YTD 2018 performance indicates a 14% decline in expenses, which Fitch tempered in our forecast. Thereafter, the base case assumes operating revenues and operating expenses increase 2.0% per annum. All cases take into account the crane lease entered into October 2017. Under the base case, senior lien DSCR averages 6.7x and all-in DSCR averages 2.5x. Including net funds available from state appropriations, which can be used for debt service, all-in DSCR averages 6.3x. Leverage is expected to increase somewhat at FYE2018 to 4.5x, due to the authority's new capital lease but trend downwards to 3.0x by FYE2022.
Fitch's five-year rating case assumes fiscal 2018 performance in line with the base case. Thereafter, it is assumed revenues will decrease 0.4% per annum and operating expenses will increase 3.1% per annum. Under the rating case assumptions, senior lien DSCR averages 5.7x and all-in DSCR averages 2.1x. Including net funds available from state appropriations, which can be used for debt service, all-in DSCR averages 5.9x. Leverage reaches 4.1x at fiscal year-end 2022.
Asset Description
The North Carolina State Ports Authority owns and operates two deep-water ports, one in Morehead City and one in Wilmington. The authority also owns two intermodal terminal networks in Charlotte and Greensboro, NC, which provide inexpensive inland transportation to and from the ports.
SECURITY
The bonds are secured by net revenues after the payment of operating and maintenance expenses. The deep-water ports in Morehead City and Wilmington generate most of the cargo operations and operating revenues.
