Fitch Affirms Jacksonville Port Authority's Revenue Bonds at 'A'; Outlook Stable
The authority also has \$19 million in unrated parity senior loans and \$62.7 million in subordinate loans outstanding.
KEY RATING DRIVERS
The affirmation reflects JaxPort's continued stable performance anchored by growing container throughput in conjunction with sizable contractually guaranteed revenues from existing long-term tenants that limit the port's exposure to operational risk. The rating also reflects the port's adequate liquidity as well as rapid amortization profile with no additional planned parity debt issuances.
Revenue Risk - Volume: Midrange
Strategically Located Southeastern Port: The port benefits from a desirable location with improving intermodal connectivity and infrastructure which helps maintain its niche importance in the international automobile trade. Nevertheless, Jaxport operates in the highly competitive Southeast Atlantic region for cargo and cruise activities with moderate trade exposure to Latin America and Caribbean markets.
Revenue Risk - Price: Midrange
Diverse Revenue Base with Contracted Tenants: The port's increasingly diverse revenue base has grown at an average rate of 2.3% for the past five years. Jaxport serves as a landlord port with 62% of its operating revenues derived from long-term leases with minimum annual guaranty (MAGs) terms from a diverse group of tenants. New services and extended agreements with previous tenants provide revenue protection for the port.
Infrastructure Development/Renewal: Midrange
Adequate Infrastructure with Development Needs: The port's current capital plan includes \$706 million for a deepwater project to dredge portions of the St. John's River to 47 feet. No additional leverage is envisaged to fund the project with majority of the funding anticipate to be generated from federal and state sources. Excluding the harbor deepening project, the total capital improvement plan (CIP) is modest at \$167.6 million.
Debt Structure: Stronger
Strong Debt Structure: Senior lien debt is 75% fixed rate, with the other 25% consisting of 2009 variable rate taxable and tax-exempt revenue notes. The variable rate portion is synthetically fixed serving to mitigate interest rate and basis risks. The debt service reserve fund (DSRF) is 100% cash funded. The debt service profile is flat to decreasing, and principal fully amortizes over the term.
Stable Financial Profile: The port has seen growing revenues despite the unfavorable economic climate in recent years, leading to senior lien debt service coverage ratios (DSCRs) of 2.4 times (x) on average and is expected to remain above 2.0x for the foreseeable future. Liquidity has increased in the recent years, reaching approximately 228 days cash on hand as of fiscal year-end 2014. Leverage is moderately high at 6.6x, which reflects the authority's recent \$25 million issuance of subordinate debt to acquire three post-Panamax cranes. Higher than average leverage is mitigated somewhat by MAGs in excess of senior debt service requirements and pledged intergovernmental transfers from the city of Jacksonville.
Peers: Jaxport's peers include other 'A' rated Florida ports, including Broward County - Port Everglades ('A'/Outlook Stable) and Hillsborough County Port District - Tampa Port Authority ('A'/Outlook Stable). Tampa has diverse business operations with contracted revenues similar to Jaxport, while Port Everglades is more reliant on cruise revenues. In terms of metrics, Port Everglades and Hillsborough have materially lower leverage and higher liquidity than Jaxport.
RATING SENSITIVITIES
Negative:
--An increased leverage position and/or measurable reductions in cash balances, which would result in less favourable coverage or leverage metrics;
--A rising expense profile which would weaken coverage ratios;
--Significant volatility in trade lanes with the Caribbean and Latin America that pressures historical financial stability.
Positive:
--Positive rating migration is unlikely in the near term given the port's potentially sizeable capital plan and recent issuance of subordinate debt.
CREDIT UPDATE
Container and automobile import and export drive the port's cargo trade. The port currently ranks as the nation's 11th largest port in terms of container trade and as the second largest in the state of Florida behind Port Everglades. The port is also the nation's largest for the import of automobiles and among the largest for exports. Container trade represents approximately 46% of the port's annual revenue base and the 936,972 20-foot equivalent (TEU) containers shipped through the port in fiscal 2014 were up 1.1% over the prior year and 4% up on average annually over the past five years. Automobile shipments handled at Jaxport declined 4% in fiscal 2014, largely due to the strengthening U.S. dollar making vehicles more expensive to purchase for exports. However, Jaxport was recently selected as Volkswagen's southeastern U.S. hub for vehicle imports and exports, and this contract is expected to import approximately 100,000 units per year for the next five years.
Contractual MAGs provide downside revenue protection from throughput volatility. Fiscal 2014 MAG revenues from throughput guarantees and lease revenues collectively represented 61.8% of total operating revenues and covered senior debt service by 2.5x and total debt service by 1.7x on a gross basis. The port has renewed a number of its contracts with long-term tenants, and these tenant agreements and terms remain consistent with previous agreements. The authority's existing operating agreement with Carnival was extended to 2016, and is expected to be renewed for an additional two years going forward. Cruise revenues account for 7% of operating revenues in fiscal 2014. The lack of longer term agreements as well as physical limitations to attract larger classes of cruise vessels presents challenges to the port's competitive position remain a concern for future growth.
The port's cargo segments provide a mostly stable revenue base supported by contractual agreements. Revenues have steadily increased in recent years and the authority has been able to manage expenses. For fiscal 2015, management budgets an increase in expenses by 5% over the prior year, however, year-to-date expenses through February of 2015 are currently 3.5% below budget.
The CIP through 2019 is sized at \$872 million, including \$706 million for a harbor deepening project. Despite the program size, management does not currently expect to further leverage at the senior lien debt level as the authority intends to prioritize large capital projects once external city, state or third-party grants, matching funds, or contributions are identified. Fitch notes that the port has received significant grant funding since 2011 and that the majority of the harbor to be deepened falls under the jurisdiction of the U.S. Army Corps of Engineers (USACE).
The authority's revenue profile is diverse and is aided by non-operating revenue sources including annual appropriation from the city's excise tax (telecommunications tax) after payment of debt service on city bonds issued for port projects and 1/4 mill from the Jacksonville Electric Authority (JEA). Funds received by the port are subordinate to and contingent on debt service payments due on the city's bonds. The authority received approximately \$5.6 million in fiscal 2014, an amount expected to decrease through 2020 when the city's bonds are paid off, at which point this revenue source could increase to around \$12 million. Fiscal 2014's net revenues generated 2.2x senior debt service coverage (1.5x all-in) and would cover maximum annual debt service (MADS) on the senior lien by 2.0x (1.4x all-in).
While Fitch's base case of steady operations anticipates financial metrics which are comparable to historical performance, the rating case contemplates a combination of automobile and cruise revenue declines as compared to current performance as well as rising expense levels. Under such a scenario, senior lien coverage could drop to the 1.5x range, with an average coverage level of 1.8x through 2019. Leverage would remain in the 5x range on the senior lien and the 6x range on an all-in basis. Subordinate obligations, including new debt associated with the purchase of post-Panamax cranes, limit total coverage levels. Liquidity may also be impacted as the authority funds capital projects in part with cash.
SECURITY
The senior revenue bonds are secured by a first lien pledge on net revenues generated from the Blount Island Marine Terminal (Blount Island); the Talleyrand Marine Terminal (Talleyrand); and the Dames Point Marine Terminal (Dames Point). The bonds are further secured by external sources including excess revenues from the City of Jacksonville from an annual appropriation of \$800,000, plus an amount equal to 1/4 mill from the JEA and a percentage of the raise in communications tax revenue over a base amount established, adjusted by an index.
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