OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' rating on approximately \$29.2 million of outstanding Commonwealth Ports Authority (CPA), Commonwealth of the Northern Mariana Islands (CNMI), senior series 1998A & 2005A seaport revenue bonds. The Rating Outlook is Stable.

RATING RATIONALE

The rating reflects the essentiality of the ports to a small, island economy amidst high exposure to economic volatility from tourism and a nearly 100% import-based cargo operation. The ports' moderate coverage, increasing liquidity, and small capital plan provide some mitigation to the potential impact of future macroeconomic stresses.

KEY RATING DRIVERS

Revenue Risk: Volume - Weaker
--Concentrated but Vital Cargo Base: The seaports remain essential for the import of goods to an island economy; however, there is potential for stagnant operational trends due to CNMI's exposure to macroeconomic factors and its elevated dependence on a limited tourist base. Volume stability is expected given that food and fuel related cargos account for approximately 60% of import-dependent revenue tonnage.

Revenue Risk: Price - Weaker
--Limited Pricing Power: CNMI's narrow economy and the overall recession limit management's economic flexibility to raise rates on seaport system tenants and users. Following the last increase in 2009, the authority's focus has instead been on effective containment of operating expenses.

Infrastructure Development & Renewal - Midrange
--Modest Capital Plan: The authority's capital improvement plan is manageable in scope and is predominantly grant funded. The remaining dollars are expected to come from internally generated funds with no future debt issuances currently anticipated.

Debt Structure- Stronger
--Conservative Capital Structure: The authority maintains 100% fixed-rate, fully amortizing debt.

--Moderate Leverage and Strong Liquidity: CPA currently maintains favorable leverage and liquidity metrics offset by modest coverage ratios. Leverage of 2.6x net debt-to-cash flow available for debt service (CFADS), and balance sheet cash and reserves available for operating expenses equating to over 1,300 days cash on hand (DCOH) provide the CPA with some degree of flexibility to meet financial commitments in weak performing periods. Further, coverage levels appear to have stabilized in the 1.3x-1.7x range with estimated fiscal 2014 coverage of 1.68x.

--Peer Analysis: Palm Beach (FL), rated 'BBB-'/Outlook Stable, serves as a comparable U.S. peer in terms of small size, moderate debt service coverage and low leverage. CPA has a less diversified revenue stream than Palm Beach while both have elevated exposure to economic volatility in their respective regions. Paita (Peru), rated 'BB-'/Outlook Stable, serves as a global peer with a similar coverage level and regionally focused importance, but with higher leverage.

RATING SENSITIVITIES

Negative:
--A severely weakened underlying service area economy that results in the seaports' inability to maintain base cargo levels at or near current levels;
--Depressed debt service coverage levels resulting from declining operating revenues despite growth in revenue tonnage;
--A shift in the seaports' short-term liquidity and financial flexibility resulting from changes in operating expense management or pricing power.

Positive:
--Given the ports' limited operating profile and significant exposure to local economic factors, positive rating migration is not anticipated at present.

CREDIT UPDATE

CNMI's limited economy is subject to macroeconomic factors and a diminished tourist base. Its ports' revenue tonnage is now nearly 100% from imports and concentrated in two main commodities (fuel and food), following the loss of the garment industry. Collectively, fuel and food represent nearly 60% of all revenue tonnage, possibly indicating that a shift in the operational profile may be nearing completion and demonstrating the essentiality of the ports to the islands' survival. The islands rely on the ports for all of their necessities, which should make demand relatively stable given that imports should never decline to a critical point.

Due to an increase in imports, total tonnage grew 20.2% to 427,539 metric tons. The increase was largely driven by other commodities which include dry goods and non-discretionary consumer goods, resulting from an improving local economy. This tonnage level represents the largest since recessionary recovery began in 2010, but is still only half of activity seen over a decade ago.

Fiscal 2014 unaudited operating revenues were up 12.7% as a result of higher seaport fees and concession-based receipts. In addition, building on fiscal 2013's expense reduction of more than 11%, management was able to reduce operating expenses by another 15.6% in fiscal 2014 due to a consolidation of airport and seaport property values. Together, this resulted in estimated 2014 debt service coverage of 1.68x, up from last year's 1.32x coverage. Debt service coverage has stayed largely stable in the 1.3x-1.7x range since fiscal 2009's rate increase and is forecast to remain there in Fitch's base case.

In the past, management was reluctant to raise rates, which led to rate covenant violations in 2007 and 2008. Following that period, actions on rates appear to have reversed the coverage deficit when combined with the austerity measures on the expense side. Fitch notes, however, that should coverage levels decline as a result of diminished operating revenues, especially in times when volume levels are stable or improving, negative rating action could be warranted.

CPA maintains fund balances of over \$13 million related to the bond indenture, in addition to \$4.4 million of unrestricted funds, and has increased DCOH (including reserves available for operating expenses) to 1,323 days. This liquidity provides some degree of financial flexibility and translates to a steadily declining and moderate net debt-to-CFADS of 2.6x. Further, management does not anticipate any future debt issuances at this time.

The authority's capital improvement plan is modest and primarily grant funded with a 25% match required from the CPA. Management has stated that assessment of capital needs is on-going, primarily anticipated for the ports of Rota and Tinian, and should not include any major undertakings in excess of current financial capacity. Fitch notes that a more forward-looking capital plan would be helpful in monitoring new projects and ensuring that any necessary maintenance and/or projects are not being deferred.

SECURITY

The seaport bonds are secured solely by gross seaport revenues and certain accounts established pursuant to the bond indenture.