Getting off your assets
Port of Baltimore offers lesson in infrastructure finance.
By Eric Kulisch
Ports increasingly are seeking to turn over their operating assets to the private sector because they don't have sufficient capital to continue with needed expansion.
The state of Maryland on Jan. 12 closed a previously announced deal with Ports America to operate the Seagirt Marine Terminal at the Port of Baltimore.
Under the 50-year concession, the terminal management company will build a fourth berth and order four new cranes at a cost of $105.5 million or more to handle next-generation containerships. Ports America will also provide $100 million in cash to Maryland's Department of Transportation for road or bridge improvements anywhere in the state.
Maryland officials claim the deal has the potential to generate $1.3 billion in annual payments, taxes, infrastructure investment and up-front cash for the state.
The 50-foot berth will match the depth of the shipping channel in the Chesapeake Bay. Many observers consider Baltimore a bit player in the container market because of its 10- to 12-hour distance from the open ocean. But infrastructure finance consultant Laurie Mahon said the port serves a large population area and has access to retail distribution centers in the mid-Atlantic region. The CSX railroad plans to expand its intermodal terminal at the port as part of its National Gateway project to link to Midwestern markets via Pennsylvania and Ohio.
Ocean carriers will have to do a cost analysis to determine if the trip is worth making, a carrier executive said.
Peter Stone, chief commercial officer at Ports America, has said the firm wanted a long-term lease for Seagirt because Baltimore is close to a concentration of warehouses, distribution centers, and manufacturers that stretches from Washington, D.C., to New Jersey and inland to areas such as Harrisburg, Pa.
Stone said Ports America believes Baltimore will have an edge over Norfolk because its northerly location will bring containers closer to more consumers and to distribution centers, reducing inland distribution costs for both shipping lines, importers and exporters.
Ports America is the largest terminal operator and stevedore in the country, with cargo handling operations at 50 ports and 97 terminals in the United States and Mexico. It is owned by the infrastructure investment firm Highstar Capital.
• Home field advantage
• Measuring port resiliency
• China's 3rd star rises
• Power at top
• Ahead two-thirds?
• Long Beach's pulse stable
Ports America was able to successfully finance the project in the municipal bond market because it was able to minimize uncertainty that has made banks skittish about making big, long-term bets on acquisitions in the infrastructure sector, and elsewhere, Mahon said.
One factor that made it easier for Ports America to borrow money is that the deal was relatively small ' $300 million ' compared to other past or current port projects.
Mahon, who served as an advisor to the Maryland Port Administration, said Ports America also benefited because it operates in Baltimore and would be able to consolidate its Dundalk terminal throughput at Seagirt. The terminal operator demonstrated that it could effectively support two-thirds of its debt through improved efficiency without requiring a lot of new traffic.
'That was huge in the eyes of the ratings agencies,' she said. 'The ratings agencies are waking up to the fact that some ports are efficient and some ports are not. So, the levels of efficiency and benchmarking your port terminal against others is really important.'
Financiers also liked the fact that the Maryland Port Administration didn't require any third party investing to make the deal work. Financing was not contingent on obtaining dredging by the Army Corps of Engineers, or the state building a new connector road.
The deal worked in the end because it was self-contained, based on reasonable container traffic estimates and involved a significant piece of equity from Ports America, Mahon said.
As rating agencies apply stricter risk analysis to borrowing for port projects, their downside scenarios routinely involve a 20 percent drop in container volume. That means investors need to put down a large amount of their own money because otherwise they won't be able to make payments if they miss revenue projections, Mahon said.
Highstar Capital invested $70 million in the Seagirt deal and is taking on $230 million in debt. The company was able to raise funds by selling tax-exempt bonds, based on the revenue stream associated with the Seagirt Terminal, because the Internal Revenue Service code doesn't distinguish between private and public entities when it relates to docks and wharves. The government essentially grants an exemption for private use of the municipal bond market because the port is the underlying owner and the property is still being used for a governmental purpose.
'I would expect that landlord ports in this country would permanently shift to that type of a procurement, unless you're a Los Angeles or Long Beach and don't necessarily need to,' said Jeffrey D. Holt, managing director for infrastructure banking for Bank of Montreal Capital Markets, during a panel discussion at the recent Transportation Research Board conference.
Only three or four ports, he speculated, have the capacity to borrow more than $200 million because the downturn in trade has so severely impacted their cash flow.
Ports that in prior years had enough revenue to pay all of their annual debt and operating expenses with plenty to spare are now squeezed by debt covenants that require them to have at least 20 percent more income than necessary to pay those bills. Ports have magnified the revenue crunch by offering rate cuts and other incentives in an effort to remain competitive with rivals and to assist struggling ocean carriers.
Municipalities or states can raise tax rates to cover debt payments, but ports do not have that option because they have longstanding agreements with tenants and could lose customers by raising rates, Holt noted.
Ratings agencies, such as Moody's, Standard & Poor and Fitch, are also scrutinizing contracts even more closely to make sure all the parties are operating at arms length and that there are no surprises in the language, Mahon added.