BRADENTON, Fla. - Moody's Investors Service on Friday downgraded the Port of Palm Beach on Florida's east coast to Baa3 from A3 and said a rate covenant violation exposes the port to potential receivership.

The downgraded rating, just a step above investment grade, applies to the port's $47.7 million of outstanding revenue bonds and includes a negative outlook.

Moody's said the lower rating was based largely on multi-year deterioration of the port's revenues and decline in debt service coverage to 0.85 times in fiscal 2008, violating the port's rate covenant and triggering provisions that allow bondholders to request a court-appointed receiver to operate the port.

No such request had been made as of Friday, according to the rating agency.

Drawing attention in the rating report to the receivership option made sense, said Moody's analyst Baye Larsen.

"I think when you see a rate violation like that, the next typical question is, 'What happens now?' " Larsen said. "We felt it was good information for bondholders, given the rate covenant violation. It's a legal remedy that is included in their bond resolution."

Fitch Ratings in April downgraded the port's revenue bonds to BBB-minus from A-minus and placed the credit on negative watch. Fitch said the port did not meet its rate covenant in fiscal 2008 and noted that bondholders retained a first lien on gross revenues from the operations.

Receivership is a common remedy available to bondholders for violations of everything from rate covenants to defaults on principal and interest payments, stressed Stephen Sanford, the port's bond counsel at Greenberg Traurig LLP. He said the port has made all of its bond payments.

"The reason the district is hurting is that commerce is down because there's a recession," Sanford said. "The key here is to realize that a receiver here is not going to do anything differently to improve commerce."

Larsen agreed that the remedy is a common feature in bond documents.

"It's just not a remedy that gets pointed out frequently because most of our issuers stay above their rate covenant," Larsen said.

The bonds are secured by a pledge of the port's gross revenues, Larsen's rating report said. Additional security is provided by a rate covenant requiring maximum annual debt service to be 110%, excluding supplemental revenues such as recurring grants. A debt service reserve fund is fully funded with cash.

The port has satisfactory liquidity of about $12 million, which provides key credit support while the port pursues new revenues and financial recovery, the report said, noting that management proactively cut expenses and is seeking new business opportunities.

A May 29 material event notice posted by DPC Data Inc. said that for fiscal 2008, "the port failed to meet the debt service coverage requirements due to a decrease in operating revenues." Revenues fell $11 million in fiscal 2008 from $12.6 million in fiscal 2007, or 12.9%, due to declines in fuel and sugar shipments as well as cruise operations.

The notice also said that the port met all financial obligations with respect to the outstanding bonds in fiscal 2008.

Bonds sold by the port in 2005 are insured by Syncora Guarantee Inc., formerly XL Capital Assurance Inc., which has seen its ratings cut to junk status. Bonds due in 2021 with a 4.125% coupon last traded on July 13 when a block of 20,000 was sold to a customer for 96.52% to yield 4.50%, according to Thomson Municipal Market Monitor.

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