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Fitch Revises Port of Palm Beach Dist, Florida Outlook to Negative; Affirms Rev Bonds at 'A-'

Posted on: Friday, 10 November 2006, 15:00 CST

Fitch Ratings affirms the 'A-' rating the Port of Palm Beach District's (Palm Beach, or the port) outstanding $52.9 million port revenue bonds, and the Rating Outlook revised to Negative from Stable. Port bonds are secured by a pledge of gross port operating revenues and amortize through 2026. The Negative Rating Outlook reflects Fitch's belief that downward rating action could be possible in the next two to three years if the port loses a significant portion of its cruise income or if forecasted gains in rental or cargo related income fail to materialize.

The 'A-' rating reflects in part the stability of the port's container trade and its moderate diversity among rental, cargo and cruise related revenue streams. Credit concerns include Florida's competitive port environment for both cruise passengers and cargo, recent upward pressure on operating expenses from higher security and insurance costs, and the potential for volatility in port operations due to extreme weather events, such as hurricanes.

Palm Beach operates as a landlord-tenant port, entering long-term leases with various shipping and terminal companies for waterfront property and facilities. In addition to the base rent the port receives under these leases, the port also levies cargo-based tariffs for ship docking, cargo transit, and other port activities. Rental income contributed the largest share of revenues, at 36%, while cargo operations (31%), ship docking (15%), and cruise revenues (6%) are other principal components. Combined, these sources produce a long-term revenue stream that can help to mitigate against cargo and cruise passenger volatility and generally results in adequate levels of overall financial performance. Tropical Shipping Company, Ltd., a general cargo shipper, accounted for approximately 33% of 2005 port revenue. Mitigating this significant concentration is the fact that Tropical Shipping has been in existence at the port since 1962 and has made significant capital investments.

The port's revenue base has been stable and has grown 4% on average annually since fiscal 2000 but some specific income streams exhibit vulnerability. Foremost was a reduction in fiscal 2005 rental income of approximately $700,000 due to the condemnation of a rental building. The building had housed non-maritime tenants, and it is management's intention to demolish the building in January 2007 for conversation to maritime storage, which management forecasts to generate from $800,000 to $1,000,000 annually beginning in fiscal 2009. Additionally, bulk commodities such as fuel oil and sugar are affected by fuel markets and by weather. The port is a significant shipment point for sugar produced in the Florida Everglades region, and hurricane damage from Wilma in 2005 reduced fiscal 2006 sugar shipments to 50% of the fiscal 2004 level. Sugarcane and beet production is not expected to reach historical levels until fiscal 2008. Bulk shipments such as sugar, fuel and cement represent 10% of the port's revenue base.

Finally, the port's cruise business has come under increased pressure. Palm Beach has created a niche cruise passenger base offering local day tours by gambling boats. The port collects a $1.50 per-passenger charge, in addition to related income such as parking and concessions and, in total, direct and indirect cruise revenues account for approximately 13% of port revenues. The port saw the departure of two smaller cruise vessels, a smaller gambling boat and a Bahamas ferry in 2006 due to financial difficulty encountered by the boats' owners. The port's remaining cruise boat, the larger Palm Beach Princess, accounts for approximately 90% of cruise revenues, but its owner, ITG Enterprises, which was obligted to sell the other gambling boat, has disclosed that it may be forced by its lender to sell either the Palm Beach Princess or its lease with the port. A new owner could opt to continue to operate the boat at the port under the terms of the current lease, such a transition cannot be guaranteed. While the port may also find additional cruise tenants such as luxury yachts, the inability to replace the Palm Beach Princess with a comparable revenue generator would be a significant credit event.

Overall, the combination of slow growth in revenues and 10% growth on average in operating expenses since fiscal 2000 have decreased the port's financial flexibility. Security expenses, for example, more than tripled between fiscal 2000 and fiscal 2005. The port still recorded a strong 35% operating margin for fiscal 2005, but it was well below the 45% margins seen prior to fiscal 2004. A comparable 36% margin is expected for fiscal 2006. Net operating revenues provided 1.48 times (x) coverage in fiscal 2005 and are expected to yield 1.58x coverage for fiscal 2006. Coverage in 2007 and beyond will be significantly lower than in recent years and is expected to be near the port's 1.25x rate covenant as debt service rises to $4.3 million. Management has responded rapidly to developing circumstances to both cut expenses and to seek additional tenants to complement its existing cruise business, but future improvement in port finances will largely depend on the continued presence of the Palm Beach Princess and on the timely and increased revenue generation from the port's current redevelopment.

Management has identified approximately $34 million in potential capital improvement projects through 2011, but will only fund them should expected third-party matching revenues materialize and internal growth targets be met. The most significant of these projects is the $12 million plan to improve container storage capacity and a $15 million reconstruction of the port's main gate. Longer-term projects, such as creating a deeper channel and lengthening ship berths, are currently in design phase pending future port and regional growth.

Palm Beach is the 21st largest container port in the U.S. and the fourth largest in Florida. Principal export markets include the Bahamas, Virgin Islands, and other nations in the Caribbean region. The lack of an advanced manufacturing capacity in many of these nations presents the port with a stable market for export of consumer goods. Cargo shipping at the port is also supported by the presence of railway switching capacity, allowing direct container transfer from railcar to ocean carrier. Palm Beach is the only port in south Florida with this capacity.

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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