CPA bonds get ‘BBB-’ rating, stable outlook

An international credit rating agency has given a “BBB-” rating to the $7.17-million revenue bonds that the Commonwealth Ports Authority is floating for the concrete paving of the Saipan seaport container yard.

Fitch’s favorable credit assessment will be followed by the sale of the bonds during the week of Sept. 19,2005. CPA, with the help of Altura, Nelson & Company Inc. as bond underwriters, is expected to sell the bonds on a negotiated basis.

At the same time, Fitch affirmed the “BBB-” rating on the $29 million in outstanding series 1998 parity revenue bonds.

The rating agency gave both bonds a stable outlook. The series 1998 and 2005 bonds mature in 2027 and 2029, respectively.

CPA’s bondholder requires that the ports authority offer a pledge of gross seaport revenues, a 1.25 debt service coverage ratio, supplemental reserve fund, and a debt service reserve fund.

“BBB” ratings, as defined by Fitch, indicate that the rated institution has the capacity to pay for financial commitments, but adverse changes in circumstances and economic conditions are more likely to impair this capacity. The “+” and “-” signs are appended to the ratings to denote relative status within the rating category.

According to Fitch, the “BBB-” rating on CPA seaport bond revenues “reflects the essential nature of the commercial harbor system, since the system is the primary vehicle for goods entering and exiting the Commonwealth.”

The Port of Saipan operates on a landlord-tenant system with private terminal operators responsible for cargo handling. Wharfage, the seaport’s main source of revenues, accounted for 60 percent of fiscal year 2004’s operating revenues; only 12 percent came from fixed, long-term rentals.

“Due to the potential for volatility, a [supplemental reserve fund] was initially funded at the $2.7 million in fiscal 2000 with additional annual required deposits of $700,000 thereafter until reaching $8 million in 2008. Currently, the SRF has $6.2 million available or 2.4 years of debt service; thereby providing liquidity for unforeseen events and funds for bondholder protection should the CPA need to restructure its debt profile,” Fitch said.

The current uncertainty in the local garment industry was also an essential factor to the rating.

Fitch noted that the Commonwealth’s exemption from U.S. tariff rules gave the CNMI’s garment industry an edge over its competitors. However, such advantage weakened because of the Jan. 1, 2005 lifting of quota restrictions.

“Forecasts project a 57-percent decline of inbound garments and a 53-percent decline of outbound finished clothing products from the CNMI during 2004-2010. Overall, the projections estimate a 27-percent decline in revenue tonnage during this period. Based on the forecast, [CPA] management has approved or is in the process of approving rate increases from $5.75 per revenue ton in fiscal 2004 to $7 in fiscal 2010. After adjusting for the increased wharfage rates and losses in tonnage, management is setting a target of 1.35 times debt service coverage, 10 percent above the rate covenant,” Fitch explained.

Furthermore, the rating reflected developments in the CNMI’s tourism industry. Fitch cited the 439-percent growth in hotel rooms from 1984 to 2005, as well as the average annual arrivals of 531,000 to the Northern Marianas.

“Fitch will continue to closely monitor the Commonwealth’s garment and tourism industries. Also, the ability and willingness of management to increase the tariff and target 1.35x debt service coverage, while maintaining the SRF moneys, is essential to the investment grade rating,” said Fitch.

The $7.17 million bonds being floated by CPA will be used to finance proposed improvements at the Port of Saipan container yard, which includes the paving of the yard and building of a drainage system approved by the U.S. Environmental Protection Agency.

CPA initially set a budget of $6 million, but later raised it by $1.7 million after finding that the amount would not be enough to fully finance the construction project, as well as interest and other processing fees.

About $6 million of the total amount will go to actual construction expenses.

Saipan Stevedore Company Inc., the sole stevedore operator at the Port of Saipan, has committed to contributing $2 million to the repayment of the bonds by amendment of its lease agreement with CPA.