Fitch Ratings defines coronavirus scenarios for North American ports portfolio

The coronavirus pandemic is having sizable and wide-ranging effects on the port space, both through disruptions to supply chains emanating from the first rounds of infection in Asia and government-imposed restrictions on individuals, businesses, and corporations alike, according to Fitch Ratings. The former directly affects cargo port volumes, while the latter affects both cruise port passengers and the broader consumer demand that drives imports and exports. Economic effects of the coronavirus are expected to generate throughput and passenger declines along with financial stresses well in excess of what Fitch expects under typical recessionary conditions.

As a result, Fitch is implementing a portfolio-wide review of its 17 standalone port credits in North America, to be completed by the week of March 30. In order to understand an issuer's exposure to financial stress and determine if a rating change is necessary, Fitch has designed two scenarios, described below, to serve as a Rating Case and a more severe Sensitivity Case. In identifying the most exposed port credits, Fitch will consider available liquidity, business mix, and counterparty exposure, as well as the quarter-by-quarter implications for throughput, revenues and expenses as ports face severe near-term stresses.
Fitch has been in active contact with the port management teams for the majority of its portfolio and is in the process of obtaining up-to-date throughput, revenue and liquidity data, along with management's response strategy. These considerations, together with issuers' longer-term ability to meet debt obligations, will inform Fitch's rating action on each credit. These rating actions will take into account qualitative and quantitative characteristics of each individual credit, but Negative Rating Outlook and Watch revisions, in addition to downgrades, are expected. Fitch expects to review the portfolio within the next week.
NEXT STEPS
Fitch has developed two scenarios that serve as the basis for its review of North American ports.
The Rating Case scenario contemplates port revenue declines of 20% to 25% in 2020, as a result of pandemic-related disruptions, with contractual Minimum Annual Guarantees (MAGs) used as a floor for revenues. It is expected that revenues will remained depressed in 2021, at only 90% of 2019 levels. Thereafter, revenue growth rates will mirror prior Rating Case growth rates off the lower revenue base and not reach 2019 levels until 2022 or later.
--For Cargo, the first half of 2020 (H1) assumes overall volume declines of 20%-30%, which reflects coronavirus shutdowns and blank sailings in the February-March timeframe on top of normal lunar new year seasonal declines in transpacific cargo, followed by continuing declines of 30%-40% through June due to softening demand as the illness slows activity in western consumer markets. H2 2020 reflects a decline of 10% year-over-year, recognizing the already low base in H2 2019 from tariff-related volume declines and overall lessened demand.
--For Cruise, H1 2020 reflects what is normally a slow period for the cruise industry, followed by voluntary shutdowns by the cruise lines starting in March, Cruise operations are assumed to see 50%+ declines in volumes depending how long shutdowns by cruise lines remain in place (initially announced for 30- and 60-day periods). Cruise assumes a H2 2020 return to cruising, but activity will be below previous years and result in a 10% reduction in revenues.
Fitch's more severe Sensitivity Case that assumes the same volume effects as above, but that contractual minimums are not honored, where applicable, due to liquidity or bankruptcy issues at the counterparties. Fitch will review its entire North American port portfolio under these scenarios to evaluate the potential need for rating actions.
The results of these scenarios will be published as a Ratings Scorecard, which will continue to be monitored throughout the evolving process.
NATURE OF PORTS
In Fitch's view, credits with high concentrations of cargo trade with Asian markets will initially see the most acute effects to volumes and revenues, with some relief expected as the pandemic dies down in Asia and volumes rebound with factories coming back online and blank sailings reducing. However, for the balance of 2020 as events unfold globally, and particularly in North America and Europe, cargo shipping is increasingly likely to face ongoing economic developments similar to the global financial crisis (GFC), pressuring volumes and revenues on into 2021.
Fitch expects the drop in cargo volumes for the first half of 2020 to exceed that experienced by most ports through the GFC in the 2007-2009 timeframe, and to greatly exceed the effects from earlier events such as the Severe Acute Respiratory Syndrome (SARS) outbreak of the early 2000's or the Sept. 11 terrorist attack. Major gateway ports have seen 25%-30% year-over-year volume drops in February, with greater declines expected in March.
Despite these pressures, Fitch expects there will be a demand floor as base levels of cargo will continue to move to meet industrial and consumer demand even in the face of an ongoing spread of coronavirus. This is in contrast to sectors like aviation, where passenger movements may be essentially halted by quarantine orders and restrictions on travel. Additionally, Fitch's rated ports benefit from a starting point of a strong financial profile, with the majority in the 'A' category, and exhibit strong liquidity positions, which will serve to soften the negative impact of volatility in the near to medium term.
For Fitch rated ports where cruise wharfage/dockage and ancillary services constitute a substantial portion of revenues, coronavirus-related suspension of cruise activity will negatively affect revenues. Carnival Cruise Line, Royal Caribbean International, Norwegian Cruise Line, and MSC Cruises announced the voluntary suspension of cruise operations in early March due to concerns over the spread of the coronavirus, with Carnival's Princess Cruises implementing the longest suspension of 60 days. MSC will not resume U.S. cruises until April 30, Royal Caribbean will not operate in the U.S. for 30 days, and Norwegian is suspended until April 11. Even before the suspension of cruises, the cruise industry noted that future cruise bookings were down.
Fitch's rated ports in the cruise space generally benefit from strong unrestricted reserves and financial positions that will help them weather a prolonged shutdown of cruise activity. Most also benefit from diversified revenue sources to service their debt, partially mitigating cruise line exposure. However, an extended multi-month shutdown followed by a period of low passenger engagement will place strain on financial metrics.
CONTRACTS AND OPERATIONAL IMPACTS
Port contractual obligations may fall under pressure due to coronavirus, and represent another area of Fitch's analysis. Ports have MAGs with terminal operators, shipping lines and cruise lines that have historically helped to insulate port revenues from volume and passenger volatility during periods of economic stress. MAGs provide a revenue floor and, for some ports, are enough to cover debt service.
Fitch typically points to MAG revenues as a mitigant to volume disruptions, but the potential for force majeure tied to a pandemic, long-term cruise suspensions or government intervention may create the possibility of counterparties contesting their requirement to honor MAGs for a period, resulting in a direct hit to port revenues. Force majeure stipulations vary across contracts and are not uniform from contract to contract. Additionally, counterparty financial duress could make them unable to make MAGs payments. Fitch notes that counterparties and ports may negotiate relief on a port-by-port basis, depending on the terms of specific contracts. Nonetheless, challenges to MAGs may call into question revenue streams which have historically been considered protected.
The coronavirus pandemic will also have varying effects on port activity levels that affect volumes as well as cost structure. Where government-mandated stay-at-home orders are in place, most port facilities are exempt from the rules with terminal staff, longshoremen, truckers, and warehouse handlers being designated essential employees. Many cargo ports remain open with normal hours, though some ports have chosen to operate on reduced schedules or have opted to cancel weekend hours in April to accommodate declines in volumes. As the disease spreads, despite social distancing in union halls and the workplace, some terminals may be forced to close should workers come down with COVID-19 and require workforce quarantines.