S&P - Public Finance Criteria (2007). - The Global Clearinghouse

TransportationPort Facilities Revenue BondsIn evaluating port revenue bonds for publiclyoperated maritime facilities, Standard & Poor’sRatings Services considers several key variables,such as competition and industry factors, includingregulation; financial performance; operations; management;and legal protections afforded bondholders.Ultimately, ports derive their financial strengthfrom their overall business position as provider ofmaritime infrastructure.Operationally, port cargo and container volumesgenerally move with broader economic variablesand trade trends, which have been quite strong,benefiting all ports generally and larger, load centeringports in particular. Most port operators donot face new competition due to the tremendouscapital investment and transportation infrastructurerequirements, and environmental and regulatoryrestrictions. Their competitive risk is the loss ofcargo or incremental growth to other markets.However, through sound planning, budgeting, andmarketing, a port can effectively mitigate somecompetitive risks.Ports are affected by external factors that remainlargely outside of management’s control. Beyond theeconomics of goods movement, political and competitiverisks, as well as the unpredictable characterof uninsurable natural hazards are all variables thatcan negatively impact a port’s competitive positionand financial outlook. Concentration in the tenantmix contributing to port revenues and the credit riskexposure to the financial condition of major tenantsis also an exogenous factor that can directly influenceport finances.To an important extent, these factors have preventedport bond ratings from attaining the ‘AAA’ ratingcategory, and make the ‘AA’ rating category difficultto achieve. The highest rated entities have diversedemand, a very strong competitive position, soundfinances and oversight, and strong legal covenantscombined with largely steadily growing volumetrends. Reliance on a very few products, tenants or afew trading partners, combined with historic volumetrends exhibiting variability usually prevents ratingsfrom rising above the ‘BBB’ rating category.Competition And Industry FactorsIn first evaluating a port’s credit strengths,Standard & Poor’s analyzes its competitive positionand those broader maritime industry and regulatoryfactors that will likely influence futurefinancial performance. Competition is examinedboth in the context of other ports (regionally orglobally) as well as other modes that provide competitionfor certain high value cargo imports orexports. The port’s relative position to competitorsis reviewed based on data pertaining to commodityvolumes, value, and the relative importance of eachcommodity type to total port revenues. The establishmentof dominant cargo centers has not eliminatedcompetition, and several smaller and largerports have survived by finding a specialty niche ina certain single commodity type or cargo-handlingmethods. Heavy dependence on a few products togenerate port revenues exposes a facility more tothe vagaries of supply and demand.Standard & Poor’s also reviews the terms of contractualagreements with shipping lines, port tenants,and shippers, or consignees. While tariffstructures and other port charges including dockageand wharfage may not be significantly different (orgoverned by maritime associations), the overall portrate structure is examined, again with an eyetoward overall competitive position. Feasibilityanalyses and/or market studies, particularly thoseprepared when the port operator is undertakingcapital improvements and incurring debt to providefacilities or related infrastructure, can be an importantsource of operational data, in addition to proforma projections they may provide. All ports areexposed to the broader industry trends affecting theshipping industry as well as regulatory and environmentalissues affecting operations.The globalization of trade and manufacturingcommensurate with the growth in the shipping andhandling of maritime cargo containers continues toprofoundly affect the way port operators conducttheir business. Transportation economics, just-intimeinventory, outsourcing, growth in consumerproducts and other factors have all fed the increasein containerization. This, along with the increasingsize of ocean-going vessels and the efforts of majorsteamship lines to develop a seamless intermodalmovement of goods through cooperation with railroadsand trucking firms, has worked to diminishthe influence of ports’ pricing of services as a determinantin the routing of cargo. Instead, the142 Standard & Poor’s Public Finance Criteria 2007