Banker urges ports to monetize the value of their assets

Banker urges ports to monetize the value of their assets U.S. port authorities are slowly waking up to the fact that they need to take advantage of the rapid increase in market valuation for their freight terminals, rather than stand by and watch tenants transfer their leases to investors for huge windfalls, according to Jeffrey D. Holt, vice president for municipal finance at Goldman Sachs.
   The way for ports to maximize the value embedded in their assets is to start acting more as financiers than owner-operators, and that means putting their terminals out for bid, Holt said last month during a session at the Transportation Research Board annual conference in Washington.
   In the meantime, they want a cut of the action from the mega-deals reached by Dubai Ports World and Orient Overseas International Corp. (OOIL).
   'Most of the port authorities felt that these terminals were simply being flipped for money and they didn't get any of it, and they've put all the investment in. So they are a little upset about this,' Holt said.
   In standing up to DP World and AIG, the Port Authority of New York and New Jersey is like an apartment building owner who doesn't allow renters to sublease their units without prior consent.
   During the past two years public infrastructure has undergone a massive revaluation as institutional investors, private equity firms and banks have lowered their target investment rates from 25 percent or higher to the low-to-mid teens for less risky, long-term returns on assets with guaranteed revenue streams. The high level of investor interest has driven up the present value of the infrastructure sector. The floodgates were opened when Australia's Macquarie Infrastructure fund began seeking opportunities in the United States and gained toll road concessions for the Indiana Toll Road on Interstate 80 and the Chicago Skyway.
   At the same time, strategic maritime industry players sought to expand their footprints and control a wider share of the growing container terminal business by acquiring competitors. That lead to the DP World acquisition of British ports operator P&O last year for more than $6.8 billion.
   How could port operators be worth so much?
   'Infrastructure buyers looked at the lease portfolios that these operators control and said that is the same as infrastructure; that a 35-year, or 50-year lease, in an existing port authority was the same as owning that facility for that period of time. It’s really just a reconcessioning of the assets,' Holt said.
   In the past year there has been a flurry of activity in the port terminal sector. In North America alone:
   * OOIL sold two pairs of terminals at the Port of Vancouver and in the New York for $2.4 billion in cash, 22 times the value of its free cash flow.
   * DP World struck a deal with insurance giant AIG for its five terminals and cargo-handling operations for what all interested observers believe is well in excess of $1 billion. A bidding competition ginned up DP World's original asking price of $750 million, which many industry analysts felt was far above the true value of the P&O Ports North America portfolio it was forced to divest by Congress. In Thursday's rebuttal letter to DP World Chief Executive Mohammed Sharaf and Christopher Lee, managing director of AIG Global Investment Group, the Port Authority of New York and New Jersey noted that DP World stands to gain $310 million — a 40 percent 'annualized return' — on the sale of the Port Newark Container Terminal, in which it invested $140 million and has held less than a year.
   * South Korea's Hanjin Shipping sold 40 percent of its terminal business in Taiwan, Japan and the United States for about $870 million to an offshoot of Australia's Macquarie Bank.
   * SSA Marine, a privately held terminal operator based in Seattle, seriously tested the waters for potential buyers before taking itself off the market.
   * New York-based Macquarie Infrastructure Partners bought the operating rights to the Halterm Terminal at the Port of Halifax.
   * Macquarie Infrastructure Partners is closing on a purchase agreement with privately held APTL Terminals Ltd. to acquire 100 percent of Fraser Surrey Docks, a container and breakbulk terminal on the main arm of the Fraser River in Vancouver, Canada.
   * TUI AG, the parent company of container line Hapag-Lloyd, has placed Montreal Gateway Terminals for sale.
   Hanjin avoided the scrutiny that DP World is undergoing in New York-New Jersey because it adhered to the change of control provision in its contract at the Port of Oakland that allows it to sell 40 percent of its stake without having to get approval from the port owner. Holt, who served as senior banker for the Alameda Corridor freight rail project, said port authority officials told him Hanjin made $40 million from the sale in Oakland.
   Port officials should study these transactions to understand the financial components embedded in the leases, Holt advised. He said the Port of Los Angeles is worth $15 billion, but is probably carried on its books for $500 million. With that added value comes additional opportunities for access to capital markets or other types of business partnerships.
   'I think the port authorities, especially the landlord ports, need to get into the mentality of a Macquarie Bank, or an OOIL or a Hanjin. They need to think about auctioning their properties' to leverage the pricing levels of the leases, rather than parceling them out to terminal operators in exchange for minimum annual guarantees on the number of annual container lifts, Holt said.
   Ports are beginning to consider carving out concessions from their long-term leases, holding managed auctions, and allowing infrastructure fund participation, with a pre-agreed upon list of operators and carriers.
   'You can still have a good operator, partnered with an infrastructure fund and get done what you need to do as a port,' Hold said.
   As leases expire, port authorities should put them out for bid and collect the proceeds in the form of a large lump sum payment up front or higher rent, Holt said.
   “The ports need to develop a level of confidence that their gateway is that much more important and vital to the economy, and that they don’t necessarily have to be the financial owner of the asset to make it work,' he said.
   Holt said the prevailing tendency to get the private sector to take the risk on building new projects while leaving existing infrastructure maintenance and upgrades in the hands of the public sector is misguided.
   'The interesting thing is that the private sector is really good at owning assets. When you take the numbers associated with a greenfield asset, if an asset is not going to cash flow for 20 years, what does accelerated depreciation mean to that asset? Zero. So the tax benefits completely wash away on a greenfield asset. You've got to have a steady cash flow, and what's more unsteady than a project that doesn't exist yet?
   “So the model that I've been proposing to folks is that there is no better developer of infrastructure assets than the public sector. The ability to use eminent domain, stakeholder outreach, consensus building, access to public grants, focusing on broad geographic regions, permitting, design-build contracting — these are things that the public sector has gotten very good at. So developing the assets and putting them together is great. Why does a public agency then feel that it’s the best owner of that asset going forward if the private sector has proven in this particular instance that it’s going to be just as efficient owning and operating the asset?' Holt said.
   The approach applies equally to highways, airports, bridges, tunnels and other revenue-generating assets managed by state and local governments, as it does to ports.
   'Maybe the public sector's role is to develop new assets, and once they get those up and cash flowing, use this process to turn those over to the private sector to own and operate, and take their development capital out and go develop a new (project). So you become less of an owner-operator and more of an agent of change in a region, someone who can dramatically affect the velocity of new infrastructure. Take the capital out of the existing assets and go build new ones.
   'Now, you can still control the old assets through the contract you have on the concession, but rolling that and increasing the velocity is really how we are going to get the private sector to help us through” the infrastructure capacity shortfall in the United States, Holt said.