OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on approximately $9.72 million of outstanding Port of Palm Beach District (PPBD) port revenue bonds, series 2005. The Rating Outlook has been revised to Positive from Stable.

KEY RATING DRIVERS
The Positive Outlook recognizes the port's continued improvement in debt service coverage ratios (DSCRs) to a four-year average of 1.75x and robust liquidity position of over 300 days cash on hand (DCOH) since 2010. Both are expected to better position the port's financial profile to weather volatile economic conditions. Moreover, Fitch takes comfort from the restructuring of the port's operating profile since the recession, which has entailed lessening the port's exposure to fuel, replacing more volatile daily cruise operators with multi-day cruise operators, and elongating the tenor of leases. To the extent strong financial metrics are maintained in upcoming years, a rating upgrade may be warranted.

The 'BBB-' rating reflects the port's narrow operating base with exposure to cyclical businesses which renders it relatively more exposed to cargo and cruise volatility than competing ports during times of economic downturn. However, Fitch views the port's stronger financial position in terms of higher coverage, robust cash balances, and low leverage as a mitigant to volatility caused by its business lines. The rating also considers the moderate rate-making flexibility of the port, given its longstanding relationships with many of its customers and tendency to continually outperform minimum annual guarantees in recent years.

In addition, the port benefits from a fully liquidity-funded capital plan, supported by operating cash flow and grants from the Florida Dept. of Transportation (FDOT). The port is constrained to the 'BBB' category as a result of its weaker franchise strength despite a debt service coverage ratio profile of around 1.75x which, if considered alone, could be indicative of a higher credit quality. Peers with similar narrow franchises are North Carolina State Ports Authority (rated 'BBB+'/Positive) and Commonwealth Port Authority (rated 'BB-'/Stable), with the PPBD's market position and rating falling in between.

CYCLICAL PORT OPERATIONS, STRONG COMPETITION
Revenue Risk (Volume): Weaker
Fitch considers the port's volume risk profile elevated due to its significant dependence on the health of the regional economy as well as relative weakness of its primary trade partners in the Bahamas and Caribbean. Moreover, nearby competition from surrounding ports in the South Florida area restrict the port's ability to meaningfully grow its cruise or cargo operations. Concentration risk is present with Tropical Shipping (port's container business provider) comprising nearly 60% of total cargo tonnage and 38% of operating revenues in FY2015, though this risk is partially mitigated by the steady growth of the container business and long-standing relationship with the customer.

MODERATE RATE-MAKING ABILITY
Revenue Risk (Price): Midrange
Minimum annual guarantees provide a moderate level of stability to the port, expected to compose approximately 50% of operating revenues in FY2016 with the port greatly exceeding this minimum threshold in recent years. Fitch views favorably the long-term nature of many of the port's lease agreements, although the cyclical nature of PPBD's customer's core businesses could pressure volume-related minimums during periods of financial distress.

CASH-FUNDED, MODEST CAPITAL PLAN
Infra Development/Renewal: Midrange
PPBD's capital plan is modest at $17.9 million, focusing primarily on the rehabilitation and enhancement of the port's current infrastructure, as the port is not constrained in terms of capacity. Credit risk is deemed low, since the capital plan is fully cash-funded via internal liquidity and grants, warranting no further debt issuances.

CONSERVATIVE DEBT STRUCTURE
Debt Structure: Stronger
The port's capital structure is considered strong, featuring all senior fixed-rate fully amortizing debt. Debt service is level through final maturity in 2026, which provides for progressive deleveraging of the port's debt profile.

LOW LEVERAGE AND ROBUST LIQUIDITY
Financial results surpassed base case expectations in FY2015, though the port did experience cruise and shoaling difficulties during the year, which had the effect of reducing DSCR from 1.87x to 1.67x. However, DSCR is expected to rise to the 1.9x level in FY2016, remaining in the 1.8x range in Fitch's Base Case thereafter due to favorable trends in both cruise and cargo operations. Fitch views favorably the port's modest leverage position of 3.1x which is expected to remain low in upcoming years. Moreover, the port's robust liquidity position of 427 days cash on hand (DCOH) provides additional financial flexibility.

PEER ANALYSIS
Comparable peers for PPBD include the Commonwealth Port Authority (rated 'BB-'/Stable) and the North Carolina State Ports Authority (rated 'BBB+'/Positive) given each port's exposure to cyclicality as a result of servicing limited regional areas. All three ports have been constrained to below the 'A' category due to the narrowness of each respective franchise, with the Commonwealth Port several notches below PPBD as a result of servicing approximately one-fourth of the cargo tonnage. North Carolina benefits from a higher DSCR than PPBD, though PPBD has lower leverage.

RATING SENSITIVITIES
Positive - Sustained Performance At or Above Current Levels: Maintenance of DSCRs in the 1.7x-1.8x range could lead to an upward rating action.
Negative - Inability to Sustain Sufficient Margins: Inability to maintain stable top-line revenue or management's inability to control expenses, pressuring financial metrics to below Fitch's rating case on a sustained basis.
Negative - Failure to Maintain Leases: Failure to extend and/or replace maturing long-term agreements when due or sign new operators as expected.
Negative - Increased Debt Burden: Material capital development requiring an increased debt burden could pressure the rating.

SUMMARY OF CREDIT
PPBD 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.

The port's cargo and cruise operations exceeded expectations in FY2015, though several issues still managed to hamper revenues slightly. Specifically, one of the cruise ships operating out of the port suffered damage in the Bahamas, and excess inlet shoaling provided for additional emergency dredging expenses in order to allow the new, larger Grand Celebration cruise ship to dock. Despite challenges faced in FY2015, the commencement of service by the Grand Celebration has proven successful in FY2016, causing passenger traffic for the seven months through April to grow nearly 100% over the same period in FY2015. Fitch expects that once the Grand Celebration's ramp-up phase is complete and marketing expenses normalize, the port will reap additional benefits, as the Grand Celebration offers nearly twice the capacity of previous cruise ships at the port. The long tenor of the lease agreement (10 years through 2025 with a five-year extension option) with the cruise line provides additional comfort, as leases of similar tenors were not in place in the past.

Moreover, the port has recently experienced an influx of demand for sugar cane, which drove sugar tonnage up 10% in FY2015, and 73% FY2016 YTD. This may reflect the recent trend towards the labeling of food products which contain genetically modified organisms, which has caused demand to generally shift away from sugar beets towards sugar cane. Though the sustainability of this trend remains unclear, in the event these positive developments continue, the port will stand to benefit. While sugar is still considered a relatively volatile commodity, Fitch views the port's current exposure to sugar as manageable, comprising only 7% of operating revenue in FY2015. Additionally, the shift away from fuel, which has evolved from over 30% of the port's cargo pre-recession to near 2% present day, is viewed as a credit positive.

Though FY2015 revenue and expense items slightly underperformed in comparison to FY2014, financial figures surpassed Fitch's base case estimates overall. Particularly, operating revenues surpassed Fitch's base case estimates by 6.4%, and total operating income exceeded estimates by 7.5%. Current performance YTD indicates operating revenues are up 17.2% over FY2015; consequently, the port's estimate of 8.6% growth in operating revenues for FY2016 is deemed reasonable. Should the port meet its budgeted figures in FY2016 as expected, coverage would rise to 1.89x from 1.67x in FY2015.

The port's $17.9 million capital plan spans FY2016 to FY2020, and mostly focuses on the maintenance and improvement of current infrastructure. Developments such as enhancements of Berth 1 and 17 and Slip 3 are expected to improve usability and enable the port to process larger volumes of business. The capital plan receives 50% to 75% of its funding via grants from FDOT, with the remainder composed of internal liquidity. Management has commented that no additional debt issuance for capital expenditures is planned at this time, though PPBD is currently in discussions regarding the refunding of its series 2005 bonds.

Both Fitch's base and rating case give the port credit for budgeted figures in 2016 in light of YTD performance. Fitch's base case models 7% growth in parking and 5% growth in cruise revenues for FY2017, with the remainder of revenue streams growing at 1%. All revenue streams grow at 0.5% thereafter. Operating expenses grow at 3%, which is slightly higher than the port's five-year operating expense CAGR of 2.6%. Base case DSCRs average 1.82x with a minimum of 1.7x, while leverage evolves down from 2.3x to 0.3x in FY2021. Fitch's rating case demonstrates a declining profile with wharfage revenues declining 2.4% year over year, while the remainder of revenue streams exhibit growth from -1.5% to 0.3%. Operating expenses grow at the five-year CAGR of 2.6%. Rating case DSCRs average 1.66x with a minimum of 1.43x, while leverage declines at a slower rate than the base, at 2.4x in 2016 to 0.7x in 2021.

While metrics alone indicate PPBD would be a candidate for the 'A' category based on Fitch's criteria, the narrowness of the Palm Beach franchise with limited ability for additional growth limits the credit to the 'BBB' category. However, Fitch recognizes the strides the port has made since the recession in terms of strengthening both its operating and financial profile. In regard to financials, Fitch views favorably the port's ability to maintain a robust liquidity position in excess of 300 DCOH since 2010, the significant de-leveraging of its debt profile from approximately 7x-9x pre-recession to 3x present day, and the preservation of DSCRs, averaging 1.75x over the past four years.