Fitch affirms ‘B+’ rating of CNMI airport revs; outlook stable

Credit rating agency Fitch Ratings has affirmed the ‘B+’ rating on Commonwealth Ports Authority, Commonwealth of Northern Mariana Islands’ approximately $5.9 million of outstanding senior series 1998A airport revenue bonds. The rating outlook is stable.

The rating reflects a small air traffic base with risk of elevated volatility tied to the islands’ limited economy. Manageable capital needs coupled with robust balance sheet liquidity in excess of debt outstanding further support the rating. Additionally, the authority maintains insurance coverage and strong cash reserves and unrestricted liquidity that more than meet debt service requirements. In addition, Fitch recognizes the relatively low debt resulting in negative leverage throughout the forecast period. Federal relief funds and the use of full passenger facility charge (PFC) collections provide sufficient cash flow to cover debt service and operations over the next year, despite continued depressed enplanement levels. While traffic improvement remains below peers, immediate financial pressures are mitigated by the airport’s robust liquidity position.

KEY RATING DRIVERS
Revenue Risk – Volume – Weaker
Highly Volatile Enplanement Base

The airport system is an essential enterprise, serving as the gateway to and within the Mariana Islands. The system serves a small, pre-pandemic enplanement base of over 700k passengers in fiscal 2018, reflecting the island’s overall population and the more limited, weaker economy. Traffic performance is potentially vulnerable to underlying economic stresses given the significant component of traffic tied to the tourism industry and service offerings are limited.

Revenue Risk – Price – Weaker
Limited Pricing Power

The authority operates under rates by ordinance. The rate methodology for air carriers operating at CPA airports is based on space usage and requires that rates be calculated annually, utilizing the next fiscal year budget. If CPA determines that airport revenues are insufficient to cover operations, the authority may increase fees and charges to an amount sufficient to meet all obligations. This enhanced pricing power allows for greater financial flexibility under an adverse operating environment. Successful implementation of the rate methodology in the coming years, demonstrating the expected stronger cost recovery, may warrant a higher price risk score for the airport.

Infrastructure Dev. & Renewal – Midrange
Moderate Capital Plan

The authority’s capital improvement plan (CIP) is modest at approximately $48 million. Existing projects include runway rehabilitation, commuter terminal construction, TSA recapitalization program and perimeter fence replacement. The CIP is predominantly grant and CPA funded. To the extent a significant portion of PFC revenue is needed for debt service, it could hamper the airports’ ability to provide required matching funds, thus limiting grant receipts. However, CPA’s substantial build-up of liquidity partially mitigates this risk.

Debt Structure – 1 – Stronger
Conservative Capital Structure

The authority maintains 100% fixed-rate, fully amortizing senior debt. Annual debt service payments are essentially level, and final maturity on the bonds is in 2028. Structural features are strong and in line with most of Fitch’s rated airports. No additional bond issuances are anticipated in the near term.

Financial Profile

Debt service coverage ratio (DSCR) was 8.6x in fiscal 2021 and is estimated at 2.9x in fiscal 2022, benefitting from the receipt of federal relief funds and insurance proceeds. The authority has reserves in excess of debt outstanding, such that leverage is presently negative. The ability to treat all PFCs as revenues provides stability and has helped the airport maintain robust liquidity levels of more than 830 days cash on hand (DCOH) in fiscal 2021 based on Fitch’s calculation. Fitch estimates cost per enplanement (CPE) in fiscal 2023 to remain elevated at over $14.

PEER GROUP

Small hub size airports with weaker revenue characteristics and elevated CPE profiles such as Burlington (BBB/Stable), and Dayton (BBB/Stable), serve as comparable Fitch-rated peers. These airports all serve smaller service areas with traffic bases below 1 million enplanements. However, in contrast to CPA, the peer airports have seen passenger volumes recovering to over 65% of pre-pandemic levels, while CPA’s enplanements have only recovered to approximately 33%. CPA demonstrates higher coverage and significantly lower leverage, though these are necessary to mitigate its more volatile operating and financial profiles and reflect the benefit of applying 100% of PFCs as pledged revenues.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Lack of enplanement recovery or continuation of material traffic declines resulting in significant revenue shortfalls and deterioration of liquidity levels given the small, volatile enplanement base.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

CPA airports’ heavy reliance on tourism and leisure travelers, creating an elevated degree of vulnerability to economic recessions both within its narrow local market, as well as to the larger, neighboring Asian markets, limits upward rating mobility;

however, should operating levels fully recover and stabilize or grow, and the rate methodology improve opportunities for cost recovery, positive rating action may be warranted.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CREDIT UPDATE

The recovery of passenger traffic continues to significantly lag behind similar small-hub peer airports, as the CPA airport system serves an island economy highly dependent on tourism from East Asia, which has been slow to recover. Enplanements increased to 168k in fiscal 2022 from 76k in fiscal 2021, recovering to only 33% of fiscal 2018 levels (732k enplanements).

Although Fitch expects limited passenger recovery in the near term as tourism slowly recovers, the reductions in revenue are offset by grants and a low debt service obligation of approximately $1.4 million. Coverage in fiscal 2022 (unaudited) and fiscal 2023 is estimated to be approximately 2.9x and 1.4x, respectively.

Positively, the authority has robust reserves (totaling $14.9 million in unrestricted cash) in excess of debt outstanding, resulting in negative leverage. CPA expects that federal relief funds provided for operations and debt service will be fully expended in fiscal 2023. Management currently has no plans to draw on reserves to meet debt service payments in the near term.

The current capital improvement plan is modest and totals $47.7 million. Approximately 81% of capex spending is directed toward Saipan Airport, 15% to Tinian and 3% to Rota. The CIP is funded with FAA and TSA grants, with a select few projects partly funded by CPA. Existing projects include improvements to the commuter terminal construction, TSA recapitalization program, fence repairs, loading bridges replacements as well as parking lot expansion and rehabilitation. For ongoing capital projects, CPA noted cost increases for supplies and materials, but these are anticipated to be temporal and not material to the overall CIP costs.

FINANCIAL ANALYSIS

Fitch’s cases assume a conservative range of traffic activity through debt maturity in 2028 and reflect limited near-term recovery to pre-pandemic fiscal 2018 levels. Both Fitch cases incorporate the planned uses of federal relief funds allocated to operations and debt service in 2023. The differences for each case focus on the level and speed of the recovery starting in 2024 through debt maturity in 2028.

The Fitch base case, which incorporates year-to-date enplanement and financial performance, reflects enplanement recovery to 37% of pre-pandemic levels in fiscal 2023. Thereafter, Fitch assumes recovery to approximately 65% and 80% of pre-pandemic levels in 2024 and 2025, respectively. Fitch also assumes that enplanements will return to 100% of pre-pandemic levels by 2028.

Non-airline revenues and passenger facility charges (PFCs) are tied to the recovery of enplanements in each year. The base case also assumes that operating expenses grow annually at 2.0% through the forecast period. Under this scenario, Fitch-calculated DSCR averages 3.0x over fiscals 2023-2028 and leverage is projected to remain negative. Results for 2023 are distorted by the application of federal grants to debt service and operating expenses.

Fitch’s rating case reflects a prolonged recovery trajectory, assuming recovery to approximately 50% and 65% of pre-pandemic levels in fiscals 2024-2025 and reaching 90% by fiscal 2028. Under this scenario, Fitch-calculated DSCR averages 1.7x over fiscal 2023-2028. Similar to the base case, leverage remains negative throughout the forecast period. Liquidity remains a key credit strength and provides a mitigant to periods of financial underperformance. Draws on unrestricted cash may be needed to meet the rate covenant of 1.25x if enplanements continue to remain at depressed levels. (Firtch Ratings)