Fitch places airport bonds on ‘rating watch negative’

Fitch Ratings, an international agency that evaluates bond ratings, has placed the Commonwealth Ports Authority’s $16.5 million airport revenue bonds on Rating Watch Negative, indicating “a real possibility” that CPA may default on its bond obligations. At the same time, it downgraded CPA’s $34.3 million seaport revenue bonds, calling it a “significant credit risk.”

The double whammy means that Fitch expects CPA to continue experiencing near break-even operations in the near term, requiring the use of any excess funds it may have to sustain operations and meet debt service needs. Fitch warned that if CPA fails to find significant sources of new revenue soon, it might run out of money in two to three years.

The airport bonds are currently rated “CCC” and are secured by a pledge of net revenues, including passenger facility charge moneys. The rating for CPA’s seaport bonds, meanwhile, fell from a “BB” to a “BBB.”

Acting CPA director Ignacio Perez said the downgrading is due to the emergency declaration Gov. Benigno Fitial issued over CPA earlier this year and the dissolution of the agency’s board.

Perez also pointed out that Fitch’s findings are based on previously available data and with a new board of directors in place, CPA has begun walking the slow road to recovery. The board had resigned en masse earlier this year when the governor issued his emergency declaration over CPA, taking direct control of the agency.

The downgrading, he said, serves as a signal for investors whether or not they would want to invest in the bonds and will “not mean anything” with regard to CPA’s ability to meet its bond obligation in the future.

Perez said the downgrade is linked to Fitial’s declaration and the loss of the board this year.

“Because of the executive order and because of the resignations of all of the board and because of the deterioration from people who have resigned or retired, that has impacted the management,” said Perez. “But as far as CPA is concerned, with the new board that has come in, they are very proactive and they’re turning things around.”

He added that CPA has begun once again hiring managers and cutting costs. New revenues from an increase in flights to the local airport will also give the agency a financial boost, he said.

CPA finances

According to a Fitch Rating statement issued yesterday, the Rating Watch Negative reflects further deterioration in the CPA’s finances.

“Financial commitments are being met; however, capacity for continued payment is contingent upon a sustained favorable business and economic environment,” the company said in the statement.

The downgrading of the seaport revenues also “reflects an approximately 40 percent decline in operating revenue” that has “significantly weakened the seaport’s financial position,” it added.

Fitch added that the downgrade is also due to CPA’s “slow pace in acting to manage the revenue side of operations” and that in the near term, the agency will “continue to suffer operating losses.”

The change in the rating, the company notes, is also due to a host of other factors outside of CPA’s control, most related to the downturn in the CNMI’s economy and the implementation of a higher local minimum wage.

Future prospects

To shore up its revenue base at the airport, CPA has applied for the PFC hardship program that would allow for greater use of PFC revenue to cover debt service. It may also be reimbursed by the Commonwealth Utilities Corp. for work done on airport property. Also, CPA is reviewing recommendations made by an airport consultant about revising its rates and charges.

“These are important developments for fiscal 2009. However, should these prospects fail to materialize, the depletion of cash balances could very well occur within two to three years,” the Fitch statement said.

CPA currently has about $1.2 million in cash at the start of fiscal year 2008 and an annual debt service of $1.4 million. At the current rate, Fitch says that CPA’s cash could be depleted within two to three years without a significant increase in revenue.

“Revised airline rates and charges, careful management of expenses and approval of additional PFC allocation for debt service could preserve liquidity beyond the near term,” the Fitch statement said.

CPA owns and operates three airports in CNMI, the largest of which is Saipan International Airport.

Without an upswing in the CNMI’s economy and passenger volume and larger PFC offsets, CPA’s options to decrease operating deficits in future years include downsizing operations and implementing a cost-recovery airline rate structure.