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Fitch downgrades $17.3 million in outstanding Commonwealth Ports
Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI),
Airport Revenue Bonds, 1998 senior series A to 'CCC' from 'B+'. The
Outlook Remains Negative. Fitch's 'CCC' category rating indicates that
default is a real possibility and capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or
economic conditions. Fitch expects CPA to continue to suffer operating
losses in the near term that will require the use of internal
liquidity to sustain operations and meet debt service needs. At the
current burn rate, CPA's cash (unrestricted and restricted) resources
are sufficient to provide another three to five years of liquidity for
operating expenses and debt service.
The series 1998 bonds are secured by a pledge of net revenues
including approved passenger facility charge (PFC) moneys. The
authority owns and operates three airports in the CNMI, the largest of
which is Saipan International Airport. The commonwealth consists of a
chain of 14 islands, four of which are inhabited, located in the
western Pacific Ocean approximately 1,461 miles south of Tokyo, Japan
and 5,690 miles west of San Francisco.
The 'CCC' rating reflects the authority's deteriorating operating
and financial profile that has been negatively impacted by losses in
CNMI's tourism and garment industries; this has resulted in a rate
covenant violation and the use of unrestricted cash to make debt
service payments in fiscal 2006. Decisions to leverage the airport to
its current debt levels were made during a period of economic growth
in the CNMI. However, at current passenger volume levels, the airport
is operating at a loss. Absent an upswing in CNMI's economy which
would boost passenger volume, CPA's options to decrease the deficit in
future years include downsizing operations and implementing a
cost-recovery airline rate structure. It may also seek the use of PFC
hardship assistance from the Federal Aviation Administration (FAA) to
continue to make debt service payments.
The rapid deterioration of CPA's finances stems from the departure
of Japan Air Lines ((JAL); Issuer Default Rating (IDR)'BB-', Outlook
Stable by Fitch), which ceased all scheduled service to CNMI on Oct.
20, 2005. At the time, JAL was the second leading carrier in the
market accounting for 26% of enplanements. Northwest Airlines (NWA),
operating under bankruptcy protection, quickly backfilled some of the
lost service, resulting in a net enplanement decline of just 9.5% in
fiscal 2006. NWA represented 44% of CPA's market share that same year.
In fiscal 2007, NWA announced capacity reductions to the Japanese
cities of Osaka and Tokyo (Narita International). Service to Osaka was
suspended, while night service to Narita was canceled and aircraft was
down gauged to an Airbus A330 from a Boeing 747 on the remaining day
flight to Narita. As a result of these changes, airline seats to Japan
will decrease to an estimated 204,000 in 2007 from a pre-restructured
high of 519,000 in 2004, representing an overall decrease of 61%.
Management remains reluctant to raise rates because an increase
could further pressure Northwest's operating levels. Furthermore,
CNMI's economy is tourism-based and faces increased competition with
other leisure destinations in the Pacific. As a result, remaining cost
competitive is deemed necessary to securing a sustainable tourist
market in the CNMI. According to the Marianas Visitor Authority, based
on the first six months of fiscal year 2007, total visitors to CNMI
are down 5.04% compared to that same period the prior year.
The credit's main strength's include the essentiality of an
airport system serving as a key transportation link to the CNMI and
CNMI's ability to continue to draw visitors. CNMI has been focusing on
developing new routes and seeking to attract new markets such as those
in Korea, Russia, China, Philippines, among others. Recent increased
service by Asiana Airlines is expected to provide about 36,816 airline
seats in 2007 between Saipan and South Korea, representing a 30%
increase. CNMI has also received increased Charter service to Russia
and Japan, but on a much smaller scale than the signatory service
lost. Further enhancing the quality of the credit is the airport's
ability to collect PFCs and federal FAA grants.
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.
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