When the largest U.S. containerports are seeing 30 percent to 40 percent decreases in monthly cargo volumes and credit markets have frozen with the downgrade of most of the monoline bond insurers and many banks, it's clear that U.S. ports are facing a unique set of economic and credit challenges.
In the opinion of Moody's Investors Service, certain credit factors - a competitive market position, financial flexibility and strong governance - will be vital for maintaining sound credit quality during the current economic and credit climate.
Moody's rates 47 U.S. ports with diverse credit profiles. Ratings range from Ba3 to Aa2, and annual cargo tonnage ranged from 300,000 short tons to 190 million short tons in 2007.
In Moody's Rating Methodology for U.S. Ports, we explain the key factors we consider when rating a port: market position, operations, financial position, debt and capital planning, and management. A strong market position is derived from the essentiality or competitive position of a port, either regionally or nationally, which can provide stability during times of economic pressure.
The ability to maintain the market position depends on the governance and operational structure of the port. For example, operator vs. landlord structures, adequacy of landside and marine infrastructure, and diversity of cargo mix directly affect a port's ability to respond to market changes.
We measure financial flexibility as the ability to adjust revenues and/or expenditures as necessary, and the level of operating liquidity maintained as cushion against financial stress. In reviewing the debt position, Moody's considers the level of leveraging, the size and affordability of future capital needs, and the strength of the legal structure protecting holders of existing debt.
Strong management, particularly important during periods of uncertainty, is generally reflected in responsiveness to changing market conditions, conservative budgeting and proactive strategic planning, as well as sound financial and debt policies.
With the contraction in the credit and economic markets, ports are simultaneously confronting decreased volume-related revenues, increased interest rate volatility associated with outstanding debt and future borrowing plans, and increased counterparty risk from banks, bond insurers and liquidity providers.
The credit crisis is also affecting the financial health of ports' customers, which is likely to result in a contraction in the port sector customer base, either through consolidation or failure of shipping lines.
Moody's expects that maintenance of a competitive market position, financial flexibility and strong governance will reinforce relatively stable credit profiles for ports during the ongoing period of financial adjustment. Ports that serve as essential cargo links and have higher percentages of nondiscretionary cargo - primarily serving economies within their local region - and/or with a lower proportion of consumer goods are less vulnerable to the current economic volatility.
Financial flexibility can be demonstrated by reducing operating and capital costs in line with revenue losses and preservation of healthy liquidity levels. (The 2007 median for U.S. ports was 383 days cash on hand). Credit stability will be most challenging for issuers in volatile consumer markets, with competitive neighboring ports, ailing customers looking to cut costs and less control over expenditures.
Strong governance is evidenced by management's response to the changing economy. Accordingly, management will have to review debt strategies, and the difficult choice of borrowing or spending reserves on capital becomes more complex when market access may remain tight for a period of time.
Many ports will also have to carefully assess competitive pressures when making strategic decisions about capital plans designed during times of growth. In some cases, ports may choose to delay or suspend capital spending plans to conserve balance sheet strength and limit additional leverage in order to offset usage and revenue declines.
While the timing and nature of the economic and credit market recovery is unknown, Moody's expects that ports with solid market positions, strong financial flexibility and sound management will be better positioned to maintain stable credit quality than those with a weaker market position and lower financial reserves. In the meantime, the dramatic changes in the market environment offer all ports a unique opportunity to consider, or reconsider, their long-term strategic, financial and capital goals.
