CHICAGO - Months after narrowly avoiding its first default, the Cleveland-Cuyahoga County Port Authority is faced with another delinquent bond-fund borrower that has warned it would likely have a tough time making its full monthly debt payments this year due to the weak economy.

The borrower, Universal Heat Treating Inc. of Cleveland, has missed its $15,500 February payment, though it is expected to make a partial payment this week, according to authority officials. The company has told the agency that, for the first time in the 10 years since it borrowed the money, it could have a hard time keeping up with its full monthly payments due to slow business.

That's not the only challenge facing the Port Authority. Earlier this week, Fitch Ratings cut its implied revenue bond rating to BBB-minus from BBB. The downgrade was mostly due to the port's internal finances, but in its report Fitch noted the delinquent borrower, and that the bond fund's financing fees - which generate roughly one-fourth of the authority's overall revenue - have dropped steadily over the last year.

Fitch is also currently reviewing the BBB-plus rating carried specifically on the bond fund. Late last year Fitch placed six of Ohio's port authority bond fund programs on ratings watch.

Despite the challenges, the authority's chief financial officer, Brent Leslie, said he is not too worried by Universal Heat's possible shortfalls this year.

"It's more of a short-term issue," he said. "We're working with the borrower now, and we really believe it to be a 2009 issue and not a long-term problem."

The bond fund has 22 borrowers and roughly $85 million of outstanding debt. Universal Heat, a Cleveland-based tool and die heat-treating company, borrowed $1.5 million from the authority in 1999 and has an outstanding balance of $580,000 - one of the lowest in the fund. The bonds are set to mature in 2014.

Leslie noted that Universal's monthly payments are scheduled to drop to $6,700 from $15,500 starting in 2010. Payments to bondholders include a $93,850 payment due May 15 and a $91,412 payment due Nov. 15, Leslie said.

The authority's bond fund program has "layers of security" to ensure the twice-annual bondholder payments will be made regardless of Universal Heat's payments, Leslie said. Reserve funds that can be tapped include the borrower's primary fund and a separate auxiliary fund.

Fitch also noted that the Port Authority has more than $8 million in unrestricted cash and investments that could be used to supplement any debt service shortfalls. But analysts said the unreserved cash is a key to maintaining its investment-grade rating, and that "the authority's ability to utilize this cash for debt service shortfalls could be pressured over time if additional bond fund borrowers become delinquent or default in the future."

Universal Heat's delinquency comes several months after the authority was forced to make the first unscheduled draw on its reserves in the bond fund's 11-year history, according to Leslie. In August, the agency redeemed $5.7 million in bonds when a financially troubled nonprofit college was purchased by a for-profit company.

The authority paid off the bonds by dipping into its auxiliary fund, taking out a short-term $2.25 million bank loan, depleting the borrower's primary reserve fund, and using money from the authority's general fund.

Meanwhile, the bond fund's revenues, derived largely from financing fees, dropped by one-third last year and are expected to remain flat throughout this year. The bond fund's fee revenue has averaged $2 million in strong years, and this year it is expected to come in around $800,000.

The decline is due to the sagging economy throughout northeast Ohio and the credit freeze in the municipal bond market last year, according to Leslie. "We had a lot of projects that came to a screeching halt in the third and fourth quarters of last year," he said.

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