Fitch Affirms Port of Houston IDR, Unltd Tax Bonds at ‘AA’; Outlook Stable
Fitch Ratings has affirmed approximately $492.4 million of outstanding Port of Houston Authority, TX (Port Houston, the port) unlimited tax bonds at ‘AA’ and affirmed Port Houston’s Issuer Default Rating (IDR) at ‘AA’. The Rating Outlook is Stable.
The ratings reflect a strong general obligation unlimited tax pledge, which is levied on a sizable and growing base that exhibits minimal taxpayer concentration. The tax base has remained steady through the coronavirus pandemic to date and is expected to continue to show strength as the recovery takes hold. Furthermore, the rating considers Port Houston’s position as a major maritime gateway for both Texas and the U.S., ranking first in the country in petroleum, steel and project cargo and sixth in 20-foot equivalent unit (TEU) throughput. The port has exhibited stable cargo revenues both through historical economic cycles and during the pandemic. Fitch notes that the port currently has no revenue-backed debt, with capital improvements thus far being funded via excess cash flows from operations. Despite a very sizable and healthy tax base, the GO rating is constrained by the Port’s ‘AA’ IDR rating, which considers the revenue generating capacity of port operations. The rating also reflects the port’s expected ability to service anticipated future debt under various sensitivity scenarios at strong coverage levels and low leverage levels that are commensurate with an ‘AA’ rating.
KEY RATING DRIVERS
Strong Port Franchise – Revenue Risk (Volume): Stronger
Port Houston is one of the nation’s largest maritime ports with numerous terminals and facilities along the Houston Ship Channel. The overall port complex ranks second in the U.S. in total tonnage and includes eight public terminals, which handle breakbulk, general and containerized cargo, plus over 200 privately owned docks and facilities. The port benefits from proximity to Houston, TX, the fourth largest city in the U.S. and an area that has shown resilience through economic downturns.
Diverse Revenues – Revenue Risk (Price): Stronger
Operating revenues are 91% derived from vessel and cargo services, with the remaining 9% coming from leases and other sources. In the breakbulk portion of the business, the port operates as a landlord with two long-term contracts for the use of dock facilities. With regards to the container side, the port runs the Barbours Cut and Bayport terminals as operator.
Sizable Capital Program – Infrastructure Development/Renewal: Stronger
While existing facilities are in good repair, the port’s sizable but manageable capital improvement plan (CIP) calls for approximately $916 million in funding for projects through 2025, and approximately $1 billion every five years thereafter. The current capital budget focuses on expansion and ongoing maintenance needs, including restoration for Barbours Cut; continued expansion of the Bayport terminal; new RTG and STS cranes at both Barbours and Bayport terminals; dredging the channel at Bayport; real estate purchases; and various turning basin, breakbulk and general cargo facility improvements. The port anticipates that operating cash flows may be sufficient to fund the CIP over the next 5 to 10 years, though should additional funding be needed the port continues to explore various financing alternatives, including revenue bonds or draws on the port’s Note Purchase Agreement, to ensure that they are prepared to fund such additional capital improvement projects.
No Revenue Debt Outstanding – Debt Structure: Stronger
The port has $492.4 million in rated unlimited tax bonds outstanding, all fixed rate, with final maturity in 2039. Debt service is fully funded from voter-approved ad valorem taxes in Harris County, with no support from port revenues. The assessed valuation of the port’s tax base is sizable at $492.1 billion in 2020 and has exhibited strong growth, as evidenced by a 6.5% compound growth rate from 2010-2020. The previous flexible-rate revolving notes program expired in September 2018, though was replaced with a new five-year, $100 million revolving note program. To date, no draws have been made on the facility, and no revenue debt is outstanding or planned at this time.
Financial metrics appear very strong. Leverage is initially negative when considering the capacity of the existing notes program, on which no draws have been made. Under Fitch’s coronavirus cases, which include revenue declines coupled with amortization of a $100 million note program, and $200 million in additional revenue-backed borrowing in 2020, coverage remains above 3.6x in all cases. By 2025, leverage still remains low at or under 1.2x in all cases.
While there are no direct comparables to Port Houston on a metrics basis given Houston’s lack of revenue debt outstanding, closest comparable ports include Port Miami (rated ‘A’/Negative), which serves the east coast/gulf and competes with Houston to some degree. Miami has considerably higher leverage than Houston; however, Houston has a larger, cash-funded, forward capital program than Miami. Both ports benefit from alternate debt financing sources for their capital plans (via Houston’s general obligation (GO) debt and Miami-Dade County’s County and Sunshine State debt). Houston also compares favorably to the Ports of Los Angeles and Long Beach (both rated ‘AA’), with lower throughput volumes but greater diversification and balance of trade in cargos.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–Given the port’s already strong profile and rating level, upward rating action is unlikely.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Future borrowing for the CIP that increases revenue-backed leverage materially above 4.0x without corresponding increases to net revenues.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Port management has indicated that they have experienced a sharp “V” shaped recovery in the latter half of fiscal 2020, reflecting effects of the pandemic early in the year followed by increasing growth during the second half of the year. Total 2020 annual operating revenues were down 1% as compared to 2019, with container revenue and container unit volumes both 1% below 2019 levels. Pro forma (GAAP) cash flow from operations of $166 million was 3% lower than 2019, mainly due to increases in coronavirus related costs (approximately $5.6 million) coupled with sustained levels of payroll and local union labor expenses.
Conversely, the Port’s saw its second highest year ever in 2020 in terms of overall tonnage across public wharves, reaching more than 36 million tons (4% below the record set in 2019). While general cargo and steel imports remained slow, container volume rebounded in the last quarter to just below 3 million 20-foot equivalent units (TEUs). Liquidity has remained relatively steady throughout the pandemic, with total cash and investments of $492.8 million (including restricted cash of $46.2 million for debt service), and unrestricted cash levels amounting to approximately 273 days cash on hand. Fitch notes that the port also has access to a $100 million note purchase program in additional liquidity, however, the port has not drawn on the facility.
Year to date total operating revenue through March reflects a 2% increase over the first quarter 2020 including 3% increase in Container Terminal revenues despite a severe winter storm that shut down operations for nearly a week in February 2021. Total operating expenses during the first quarter of 2021 are 1% greater than the 1Q20, primarily due to increases in noncash depreciation expenses during the quarter.
Port Houston’s taxable district includes the entirety of Harris County, which is the center of the Houston MSA. Harris County is the largest county in Texas and the third largest in the nation, encompassing all but a small portion of the city of Houston, with a population totaling over 4.6 million. The county features a large, diverse economy that remains exposed to the energy sector. Expansion of the healthcare, biomedical research, aerospace, port, and petrochemical industries over the past several decades has reduced the historically strong reliance on the energy exploration sector. The tax base is substantial at $492.1 billion in tax year 2020/ collection year 2021, growing by a CAGR of 6.5% from 2010-2020. The taxpayers are very diverse with the largest taxpayer, Exxon Corporation, representing 0.8% of total assessed value in 2020. The top ten is only 4.04%.
The port provided Fitch with its detailed CIP budget and liquidity analysis through 2025, and Fitch used this forecast as a basis for its cash flow models in conjunction with updated case assumptions for seaports due to the effects of the coronavirus pandemic. The Fitch cases also assume the notes program is refinanced with $100 million of 10-year long-term fixed-rate debt at 5% in 2021. An additional $200 million revenue-backed debt issuance is also assumed to be issued in 2022 to further support the full CIP through the coronavirus pandemic. Fitch notes Port Houston management plans to fund the CIP through operational cash flow, but is considering various funding options for the future, including additional debt.
The coronavirus rating case assumes cargo volumes are at approximately 94% of 2019 levels in calendar year 2021, with recovery to previous 2019 levels by fiscal 2022. Under this case, coverage averages 6.7x, with leverage reaching 0.6x by 2024.
Fitch’s coronavirus downside case assumes declines in 2021, followed by a slower recovery to 2019 levels, returning to 2019 levels by 2023. Under this case, coverage averages 5.9x, with leverage reaching 1.2x by 2024.
Fitch views the port’s credit profile as extremely robust, with strong coverage levels commensurate with an ‘AA’ rating, even through the coronavirus pandemic. While leverage spikes under these cases, including the issuance of $300 million in revenue-backed debt, Fitch notes no draws have been made on the $100 million note program and no revenue debt has been issued. In addition to resilient credit metrics, the port benefits from flexibility provided by its liquidity position, its stable historical performance, and its ability to potentially fund future CIP needs.
Enhanced analysis under the variation relates to the evaluation of the strength of the tax revenue and legal framework to support operations. This evaluation is supported by Fitch’s “U.S. Public Finance Tax-Supported Rating Criteria” dated May 4, 2021.
The port owns a diverse group of facilities designed to accommodate a variety of cargo, including general cargo, containers, grain, coal, pet coke, dry and liquid bulk, and project and heavy lift cargo. In operation since 1914 as a deep draft port, the port is ranked first in the nation for foreign waterborne tonnage and total tonnage. The Houston Ship Channel extends 52 miles inland and links the city of Houston with the Gulf of Mexico. The channel serves some of the largest petrochemical terminals and refineries in the world. Generally, the port acts as a landlord port for breakbulk cargos, while acting as an operator for the container terminal yards, with a few exceptions.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
Source: Fitch Ratings