FITCH GIVES NEGATIVE RATING TO CNMI PORTS

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BONDS
Weak economy, reduced revenues cited

By Moneth Deposa SAIPAN, CNMI (Saipan Tribune, Feb. 5, 2011) - Fitch Ratings has affirmed a "BB-" grade for the Commonwealth of the Northern Mariana Islands (CNMI) seaport bonds, indicating a negative rating outlook for all seaport bonds.

According to the nationally-recognized credit rating agency, a negative outlook rating reflects the possibility of a "restrained capacity" to meet financial commitments of the Commonwealth Ports Authority's business profile and the CNMI's economic environment continue to go down.

The Commonwealth Ports Authority (CPA) has about US$33.5 million of outstanding revenue bond obligations under senior series 1998A and 2005A bonds.

CPA executive director Edward Deleon Guerrero did not respond to several emails and phone calls yesterday for comments.

Fitch Ratings cited two main areas of concerns that prompted the negative rating for the Ports Authority. One is the potential for prolonged economic weakness arising from the Commonwealth's weak underlying economy, with an elevated dependence on a diminished tourist base.

Fitch said the fragile tourism sector has led to a reduced productivity on the islands and the Commonwealth also faces competition as a leisure destination from other islands in the Pacific.

Another major concern is the sustained reduction in the ports' inbound revenue tonnage affecting seaport revenues and debt service coverage levels.

The rating agency noted that the CNMI ports' ability to return to historical financial strength will require a sustained increase in wharf rates, which will have a dampening effect on demand and will increase the cost of goods across the islands.

The U.S. plan to relocation about 8,000 military personnel and their dependents from Okinawa to Guam by 2014 could also lead to inter-island migration that would further dampen local demand, Fitch said.

Future inbound cargo operations of the islands will rely on its internal demand for raw material and goods, it added.

To improve the credit rating status, Fitch recommended the following steps: continued changes in the underlying service area economy and the seaport's ability to maintain base cargo levels; shift in the seaport's short-term liquidity and financial flexibility resulting from changes in operating expense management or pricing power.

"The seaport bonds are secured solely by gross seaport revenues and certain accounts established pursuant to the bond indenture," said Fitch.

Meantime, Fitch enumerated the following areas as strengths of the CNMI's seaports credit rating: essentiality of the seaports for the import of goods to an island economy; management's focus on and effective containment of operating expenses through various adjustments to personnel and operation as well as the ability to adjust rates to mitigate lower revenue tonnage; and providing some degree of flexibility to meet financial commitments in weak performing periods.

Fitch forecasts that the Commonwealth seaports will see no growth in activities in the near future. This could result in the depletion of cash balances in 2020, unless the economy recovers and cargo operations show sustainable growth.

It noted that CPA posted a 2.7-percent increase in total revenue tonnage in fiscal year 2010 with 375,442 metric tons compared to fiscal year 2009. This reverses five years of consecutive decreases in cargo activity at seaports.

For inbound cargo, the Ports Authority noted 4.5 percent increase while outbound cargo is down by 20 percent last fiscal year.

In fiscal years 2008 and 2009, cargo declined by 5 percent and 22 percent respectively because of the loss of what remained of the garment manufacturing business, the global recession, and the fragile tourism sector.

Since 2004, the CNMI's inbound cargo and outbound cargo lost 47.3 percent and 86.8 percent of its revenue base respectively. Fitch believes that the current level of cargo is now tied more closely to the economic activity of the Commonwealth.

The Commonwealth of Northern Mariana Islands is reportedly optimistic of a positive cargo performance this fiscal year, but Fitch said that no projections were provided.

Based on preliminary data, CPA posted a 4.6-percent increase in seaport operating revenues in fiscal year 2010 at US$6.5 million. In fiscal year 2009, operating revenues went up 21.2 percent to US$6.2 million. Both increases are due to seaport tariffs and concession franchise fees.

Based on the Commonwealth Ports Authority's unaudited financial data, its seaport operating expenses amounted to US$2.1 million-an increase of 2.4 percent over 2009.

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