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Fitch Places 'CCC' Rated Commonwealth N. Mariana Islands Airport Bonds on Watch Negative

Posted on: Tuesday, 21 October 2008, 15:00 CDT

Fitch Ratings has placed $16.5 million in outstanding Commonwealth Ports Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI), airport revenue bonds, 1998 senior series A, on Rating Watch Negative. The bonds are currently rated 'CCC'. Fitch's 'CCC' category rating indicates that default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. The series 1998 bonds are secured by a pledge of net revenues including approved passenger facility charge (PFC) moneys. The authority owns and operates three airports in CNMI, the largest of which is Saipan International Airport. The commonwealth consists of a chain of 14 islands, four of which are inhabited, located in the western Pacific Ocean approximately 1,461 miles south of Tokyo, Japan, and 5,690 miles west of San Francisco.

The Rating Watch Negative reflects further deterioration in the CPA's financial profile given the suspension of airline rates and charges put into place by the previous board at the beginning of fiscal 2008. Since that time the Governor has taken control of the CPA and established new board members. The CPA has applied for the PFC hardship program which would allow for greater use of PFC revenue to cover debt service, and may also receive a reimbursement of funds from the Commonwealth Utility Commission for work done on airport property. In addition, the CPA is also reviewing recommendations made by an airport consultant with respect to revising 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. 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 'CCC' rating reflects Fitch's expectation that the CPA will continue to experience near break-even operations in the near term that will continue the use of internal liquidity to sustain operations and meet debt service needs. At the current rate, CPA's cash (unrestricted and restricted) resources are sufficient to provide another two to three years of liquidity. With cash of approximately $1.2 million as of the beginning of fiscal 2008 and annual debt service of $1.4 million, CPA's cash could be depleted without a significant increase in revenue. The rating also reflects the deterioration of the underlying economy driven in large part by reduced tourism and the implementation of a minimum wage that has significantly reduced the size of the garment industry, which was a significant contributor to the economy. In addition, the CPA faces the challenge of balancing the need for certain essential capital improvements and covering all its expenses. The credit's main strength's include the essentiality of an airport system serving as a key transportation link to CNMI and CNMI's ability to continue to draw visitors. Absent an upswing in 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.

The authority's deteriorating operating and financial profile has been impacted negatively by losses in CNMI's tourism and garment industries, resulting in rate covenant violations and the use of unrestricted cash to make debt service payments in fiscal years 2006, 2007 and 2008. Operating revenues and expenses were both down in fiscal 2007 from 2006 by negative 10.5% and negative 7%, respectively. Aviation and concession revenue continue to be challenged given the smaller base of traffic. CPA continues to make efforts to reduce operating expenses through the use of scheduled work reductions and the elimination of non-essential expenses. CPA will continue to be challenged to balance operating expense reductions with the need to provide a safe operating facility.

Utility cost management will prove difficult as CNMI depends upon diesel imports for power generation.

The rapid deterioration of CPA's finances also stems from the departure of Japan Air Lines (JAL; Issuer Default Rating (IDR) 'BB-', Stable Outlook by Fitch), which ceased all scheduled service to CNMI on Oct. 20, 2005. At the time, JAL was the second leading carrier in the market, accounting for 26% of enplanements. Northwest Airlines (NWA) quickly backfilled some of the lost service, resulting in a net enplanement decline of 9.5% in 2006. Traffic continued to decline across the three airports through fiscal 2007, representing an overall decrease of 10% in fiscal 2007. Traffic appears to be settling around this new lower base, with 2008 enplanements totaling 546,588, up from 529,002 in 2007 or 3%. Despite passenger traffic appearing to stabilize, 2008 traffic remains about 20% down from a high of 661,538 enplanements in 2004. Given the current state of the airline industry, service adjustments are likely to continue over the near term and have the potential to present additional challenges for CPA.

CNMI's economy is tourism-based and faces increased competition with other leisure destinations in the Pacific. As a result, remaining cost-competitive is deemed necessary to securing a sustainable tourist market in CNMI. Since 2005, CNMI has been focusing on developing new routes and has shown some success with the development of new markets such as those in Korea, Russia, China, and the Philippines. Increased service by Asiana Airlines represented 132,233 enplanements at Saipan International Airport in 2008, up 19% over 2007. CNMI has also received increased Charter service to Russia and Japan, but on a much smaller scale than the signatory service lost.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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