The entrance to new underwater tunnels that will carry traffic to PortMiami and avoid downtown congestion. The $1 billion tunnels open to traffic this month.

BRADENTON, Fla. - Miami-Dade County plans to lower borrowing costs for its $1 billion PortMiami capital plan by issuing of $208 million of bonds in variable rate mode this week.

Photo Gallery: PortMiami Builds For the Future

The deal comes following a downgrade that created a two-notch differential in credit assessments, after Moody's Investors Service lowered its long-term rating to Baa1 from A3 citing the port's capital plan, tight financial margins, and lower coverage ratios.

Fitch Ratings affirmed its A rating.

The county will use $180 million of bond proceeds as the final payment of $354.5 million it's contributing to the construction of twin underwater tunnels to provide an alternative route to PortMiami.

The 4,200-foot-long bored tunnels, the largest diameter soft-ground tunnels built in North America, are expected to open this month, allowing cruise and cargo traffic to bypass the current entrance to the port through downtown Miami.

Another $20 million of proceeds will go toward the purchase of additional super gantry cranes in preparation of larger ships coming through the expanded Panama Canal, improvements to the port's cargo yard, and other upgrades.

The tax exempt deal is structured as $187.3 million of variable rate demand bonds, Series A, and $20.8 million of Series B VRDBs that are subject to the alternative minimum tax.

Final maturity on the Series A bonds is in 2049. Interest will be paid starting in 2014 but principal payments won't begin until 2043 after outstanding debt is retired.

The bonds will be issued initially in the weekly mode, and secured by net revenues of the seaport.

The Bank of Tokyo-Mitsubishi UFJ is providing letters of credit for both series. If net revenues from the port are not enough to pay the bank for the LOCs, Miami-Dade has covenanted to budget and appropriate non-ad valorem revenues, if needed.

The letters of credit were rated Aa2/VMIG-1 by Moody's and AA-minus/F1 by Fitch.

Miami-Dade decided to use VRDBs for this offering to lower borrowing costs while waiting for additional revenues to come in from the state that eventually will secure the debt along with other net revenues of the port, according to county documents.

Though the variable-rate market has contracted severely since the credit crisis began in 2008, short-term rates are historically low and issuance is expected to pick up as long-term interest rates rise and issuers rebalance the ratio of variable to fixed rate obligations, Moody's said in March.

PortMiami is implementing a $1 billion, five year capital improvement plan to modernize and improve its competitiveness, county officials said in April when the current bond issue was initially approved.

The capital program is pressuring the port's ratings.

In downgrading the long-term underlying rating on the port's revenue bonds to Baa1, Moody's said it factored in an additional $222 million of debt that will be issued for the port's capital improvement program through 2018.

With the additional debt, the base-case financing forecast shows that debt service coverage ratios will be pressured even with continued growth in cruise passengers, cargo, and related revenues, Moody's analyst Maria Matesanz said. By fiscal 2017 seaport direct debt coverage drops to 1.57 times and total coverage drops to 0.94 times.

Fitch considered future debt issuance, though its A rating is based on the current offering.

"Should additional future borrowing increase leverage significantly without corresponding increases to net revenues, the rating may be pressured," Fitch analyst Emma Griffith said. "Given the port's increased annual debt service and higher CIP commitments in coming years, it will be important for management to continue to control operating expenses."

Alan Schankel, managing director at Janney Capital Markets, said the two-notch split in ratings is "a little bigger than I like to see," though he felt each agency weighed factors such as the issuance of future debt differently.

"Fitch emphasized the additional bonds test, which means that when and if [the county] issues future debt they have to meet debt service coverage or they can't issue new bonds," he said.

For most issuers, the trick is to balance new debt with future revenues, particularly if they are anticipated to come from new projects, said Schankel.

"I think Moody's is more concerned about the debt than Fitch is in terms of weight in the total analysis and for that reason they downgraded" the port's bonds, he said.

Moody's said its Baa1 rating incorporates the strength of the port's market position as the world's largest cruise port and the expansion of key revenue-generating port facilities that will continue to solidify its market position.

Analysts have expressed concern about PortMiami's close proximity to Port Everglades in Fort Lauderdale, which is about 30 miles to the north. The two compete for cruise and cargo business, and both have dredging projects.

PortMiami benefits from stable revenue streams through diversified business lines, according to Fitch. Some 54% of revenues come from cruise operations while 38% of revenues come from container operations.

The port is home to 13 cruise lines. The 2013 cruise season marked the greatest fleet expansion in a single season, which included two new cruise brands with the arrival of Regent Seven Seas Cruises and Disney Cruise Line and three newly built ships, according to the port's website. Four million people cruised from Miami last year.

This year, another new line - Italian brand MSC Cruises and the MSC Divina - arrived as did Norwegian Cruise Line's newest ship, the Norwegian Getaway.

The new twin underwater tunnels opening this month will ease severe congestion in downtown Miami - the only way to the port now - and provide trucks hauling cargo with a direct and faster connection to the port from the interstate.

The Florida Department of Transportation is building the Port of Miami Tunnel through a public-private partnership costing $663 million for design and construction, and $450 million for milestone payments to the concessionaire as it completes certain obligations.

The tunnels will not be tolled. FDOT is paying for half of the capital cost as well as operations and maintenance from budgeted statewide maintenance funds. Miami-Dade is about to pay off its $354.5 million cash contribution, while the city of Miami financed its $50 million contribution. Both the city and the county donated right of way.

The concessionaire, Miami Access Tunnel or MAT, put $80.3 million in equity into the 35-year project with Meridiam Infrastructure and Bouygues Travaux Publics as the two shareholders. The concession agreement expires on Oct. 15, 2044.

Two other major improvement projects are under way. PortMiami created an intermodal yard and is reestablishing a rail system that was discontinued following a hurricane several years ago.

Miami-Dade used $162 million of bond proceeds sold last August to pay for a portion of the "Deep Dredge Project" to increase the depth of the port channel to 50 feet from about 40 feet.

The dredging is expected to be done in time for PortMiami to receive the new generation of larger container cargo vessels that will be able to pass through the Panama Canal after its $5.3 billion expansion and addition of larger locks is completed.

The new locks will allow the passage of supertankers and larger, modern container ships that require up to 50-foot channel depths. Those vessels are 160% larger than the largest "Panamax" ships that traverse the canal today.

Public Resources Advisory Group is the financial advisor for the sale of this week's bonds.

Barclays Capital Inc. is the book-runner and remarketing agent. Other underwriters on the deal are Cabrera Capital Markets LLC, Jefferies, RBC Capital Markets, Rice Financial Products Co., Blaylock Beal Van LLC, Drexel Hamilton LLC, Estrada Hinojosa & Co., Loop Capital Markets, Siebert Brandford Shank & Co., Southwest Securities Inc., and Wells Fargo Securities LLC.

Hogan Lovells US LLP and the law offices of Steve E. Bullock PA are co-bond counsel. Edwards Wildman Palmer LLP and Rasco Klock Perez & Nieto PL are co-disclosure counsel. Greenburg Traurig PA is underwriters' counsel.

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