Spending nearly $1 billion on a new tunnel, dredging and rail yard may bring PortMiami too much debt as it faces competition for cruise passengers and cargo business, according to financial analysts at Moody’s.
The firm recently downgraded PortMiami’s credit rating, warning that the more than $700 million in debt it needs for the projects would bring a cash squeeze to the world’s busiest cruise-ship hub. Investors are taking notice, with PortMiami paying a premium to sell about $384 million in bonds on Wall Street this week.
Underwriters on Tuesday placed the initial interest rate of the new port bonds at 5.58 percent, which is higher than the 5.15 percent return for the average government bond selling Tuesday, according to Reuters. The premium suggests investors saw the port debt as a little riskier, and comes as some deep-pocketed buyers opted to spend their cash elsewhere.
“It’s a borderline credit, it was just recently downgraded and the trends don’t look good at this point,” said Burt Mulford, a portfolio manager at St. Petersburg-based Eagle Asset Management Inc., which oversees about $2 billion of municipal debt. “We’re taking a pass.”
While closely watched on Wall Street, the bond market’s scoring of government debt mostly amounts to a few basis points of interest expense for borrowers. But the analysis behind the debt sale offers another look at how the port’s celebrated expansion strategy may impact county finances during an ongoing budget squeeze.
A $300 million dredging of the port will lower the sea floor by 10 feet and make Miami the only port south of Virginia deep enough to accommodate the larger ships that will be using the Panama Canal once its own dredging project finishes in 2015. A $1 billion tunnel, funded with government and private dollars, is set to open next year, diverting cargo trucks from downtown Miami to the MacArthur Causeway. Another $28 million will go into a rail yard allowing trains to move cargo from the port to the rest of the country.
Bill Johnson, director of PortMiami, dismissed Wall Street concern about rising debt payments and called the facility “the best investment in the world.” A report by Fitch, one of Moody’s competitors, is generally upbeat. Fitch concluded growth in cruise and cargo revenue will leave PortMiami in a comfortable position financially.
Still, the Moody’s downgrade comes at an unwelcome time. Miami-Dade Mayor Carlos Gimenez is vowing to cut library and fire-rescue budgets in order to preserve current tax rates, with hundreds of layoffs on the horizon.
PortMiami needs to borrow an additional $400 million for the projects, Moody’s said.
A 2012 financial statement and the Moody’s report show the port revenues currently pledged to pay back about $136 million in outstanding bonds, with another $450 million borrowed by Miami-Dade County on the port’s behalf. The Moody’s report said the squeeze would come in 2017, with higher payments from the new debt leaving the port short of the money it transfers to the county each year to cover debt payments. Payments tied to the $450 million in county debt amounted to about $17 million last year, according to the financial statement.
“When looking at the total seaport debt picture,” Moody’s wrote in its Aug. 27 report, “the port’s net revenues will not be sufficient to reimburse the county for the payment of debt service ...”
The Fitch analysis set those county transfers aside in giving PortMiami an “A” rating late last month. Griffith said including the county pledges probably would bring a lower rating. But Fitch still sees operating profits covering both debt payments and the county transfers in 2017 and beyond.
“We were comfortable they will be able to meet these obligations,” said Emma Griffith, a director at Fitch.
Port officials say they have sufficient cash reserves to cover any gap from the new borrowing until revenues pick up enough to absorb the higher costs, Moody’s’ said. The firm cut the seaport’s rating one level last month to A3, four levels above a “junk” rating. The report cited competition from Port Everglades for both cruise and cargo dollars.
At the moment, PortMiami bonds are trading about 6 percent higher than are other benchmark bonds, according to Bloomberg.
That means investors buying the port’s existing bonds from other investors currently require a premium in the form of higher interest rates. For the port, it’s one of the biggest spreads of the year, a sign that investors see safer bets in other government debt, data compiled by Bloomberg show.
Revenues at the port have generally grown through the downturn and recovery, but last year they dipped by 5 percent to $104 million. Cargo growth was flat and cruise passengers dropped 4 percent to 3.8 million. The port relies on cruise operations for about 44 percent of revenue, compared with 40 percent from cargo, offering documents show.
With new Disney ships coming this fall and contracts with Carnival, Royal Caribbean and NCL set to grow, the port sees revenues increasing for the rest of the decade. A feasibility study ordered by the port forecast that operating income will increase 10 percent annually through 2018, to $77.8 million. The study, by Long Beach, Calif.-based Moffatt & Nichol, Inc., said contracts with major cruise lines and increased cargo shipping after 2015 would add revenue.
Once the Panama Canal opens up to larger ships, Miami-Dade expects its port to reap the financial rewards from more cargo.
“Everything is on schedule, everything is on budget,” Johnson said.
Bloomberg’s Toluse Olorunnipa reported from Tallahassee; Miami Herald staff writer Douglas Hanks contributed to this report.