BRADENTON, Fla. — The Port of Palm Beach, located in one of Florida’s wealthiest areas, saw one of its revenue bond ratings drop below investment grade last week.
Moody’s Investors Service downgraded the port’s $45.5 million of outstanding debt to Ba1 from Baa3 and maintained its negative outlook.
The Palm Beach Port is Florida’s fourth busiest container port and is the 18th busiest in the continental U.S., according to its website.
“The downgrade reflects the port’s volatile operations with a multi-year decline in cargo, TEUs [20-foot equivalent units], and cruise passengers due to both the economic downturn and an erosion of the port’s market position,” Moody’s analyst John Medina said, noting the high degree of regional competition with ports in nearby Miami, Fort Lauderdale, and Cape Canaveral.
TEUs are a measure of containerized cargo traffic.
The rating action also incorporates the port’s significant concentration in two revenue generators and narrow debt-service coverage levels that were below the port’s 110% rate covenant in fiscal 2008 and 2009. The coverage level is projected to be at or near the rate covenant by the end of fiscal 2010 because of new cruise and shipping contracts, according to Medina.
“The outlook remains negative given the ongoing uncertainty surrounding the port’s fundamental market position and financial performance,” he wrote.
Paul Zielinski, the port’s chief financial officer, described the downgrade as “disappointing,” given that economic conditions are improving. He said he hoped Fitch Ratings and Standard & Poor’s would maintain their current ratings.
Year-to-date performance is ahead of fiscal 2009, with revenues up $1.4 million and expenses down by $400,000 through May.
“Cargo tonnage is up nearly 18% to date this year, as container shipments stabilized and bulk imports grew dramatically,” Zielinski said. “Operating expenses to date are down nearly 7% below FY 2009.”
The Port of Palm Beach covers 971 square miles. Its major products include bulk sugar, molasses, cement, utility fuels, and produce.
Earlier this year, the port signed a five-year contract with the 680-foot Bahamas Celebration, a cruise ship expected to generate approximately $4.2 million in annual gross revenue. Zielinski, said revenues from the Bahamas Celebration will more than offset those from a day cruise operation lost in January.
The Port of Palm Beach is authorized to levy ad valorem taxes, but has not done so since 1975. Commissioners declined to levy a tax in fiscal 2010, the port website said.
The port has successfully raised tariffs, cut costs, and signed new contracts the past year, but Moody’s said the junk-level rating was justifed by the fundamental deterioration of its market position from historical levels, coupled with significant concentration from two revenue generators and its uncertain near-term financial performance.
Officials estimate the port will generate sufficient revenue to cover debt service at least by one time and may meet the rate covenant of 1.1 times. That coverage represents an improvement from fiscal 2008 and 2009, when debt-service coverage was 0.65 times and 0.7 times respectively, according to Moody’s
In fiscal 2009, the port had gross revenues of $10.6 million, operating expenses of $7.7 million, and 381 days’ cash on hand.
“While illustrating the beginning of a turnaround, the port’s volatile business and limited scope of operations could result in another rate covenant violation in an uncertain economic environment,” Moody’s warned.
The port’s rate covenant violation and weakening financial position prompted Fitch and Standard & Poor’s in early 2009 to downgrade their ratings to BBB-minus from A-minus and BBB-minus from BBB-plus, respectively. Fitch placed the debt on negative watch while Standard & Poor’s gave a negative outlook to the rating.