11 Jan 2010 | USA
Catherine McGuirk, Infra-Americas
Highstar Capital's lease of the Seagirt container terminal in the Port of Baltimore is the first major movement in the US ports sector since the cluster of container terminal and services acquisitions in 2007. The 50-year lease is a very different kind of transaction from the wholesale acquisitions of yesteryear, however, and demonstrates the reassessment of asset valuation and a more conservative approach to sponsor risk appropriation in the aftermath of the financial crisis.
Ports America Baltimore (PAB), Highstar's existing operator at the port, is the parent company of Ports America Chesapeake (PAC), the project company. It closed the US$334m financing for its concession on Jan.7, 2010. The financing features debt of US$259m, issued in tax-exempt economic development revenue bonds, and US$75m of sponsor equity. The bonds were underwritten by bookrunning senior manager Goldman Sachs and co-senior managers Citi and Bank of Montreal.
Bond coupons and yields
The paper was issued in two series: The senior lien is US$170m of Series A notes, US$140m of which will be used to fund the upfront concession payment to the Maryland Transportation Authority (MdTA).
The remaining Series A bonds, plus a second lien of US$89m Series B notes, and the US$75m of equity will be used to fund the transaction fees, capital and operation reserve accounts and preliminary capital expenditure.
The senior bonds, which have been rated Baa3 by Moody's, have a 25-year maturity. They were priced with a coupon of 5.125% and a yield of 5.25%. Under the amortization schedule, the bonds are interest-only until 2016. Principal amortization will begin in 2016, and level debt service will follow from 2018. The 15-year Series B notes carry a coupon of 5.375% with a yield of 5.5%; and a short tranche of 10-year notes were priced at 5.75% with a yield of 5.875%. According to a source close to the placement, the sale was oversubscribed by around 6x, with 30 institutions buying the bonds.
Sponsor profile
The ownership of the concession is a little complex, as PAB runs some existing port operations in the Port of Baltimore, and while the PAC revenues are secured by contracts with major shipping lines and port users, the existing contracts are with the parent, PAB. Most of the contracts run for 20 years, and many are due for renewal in the next few years and, if renewed, will be done under the PAC operation. MSC and Evergreen are the port's two major users.
The asset complements Ports America's existing portfolio; there are obvious benefits of an increased presence at the Baltimore port, but the operator also has a presence in 42 ports across the US. The Highstar synergies stretch much further, and have protected Ports America, to some extent, from the full brunt of the downturn in trade. US ports volumes were down by 8%, year on year, in 2008, and by 20% in 2009. According to Christopher Lee, Highstar Capital's founder and managing partner, one of Ports America's advantages is that its "management understands the downturn, and is addressing all inefficiencies and economizing." He uses the example of purchasing rubber tires for use at the ports. "Historically, each terminal had purchased its own tires. By centralizing that procurement process, and buying in bulk volume, we made significant savings," he says. Some of these strategies are a necessary, but temporary, reaction to the downturn, but Lee believes that "around 80% of our cost-savings plans will remain as permanent."
Even in the more bullish times in the US ports sector, Highstar's Ports America kept a comparatively conservative investment attitude. Ports America acquired the seven P&O container terminal assets in North America from DP World in March 2007 for $955 million. The deal was the first of the major acquisitions to close. It was financed with a bank debt solution, with pricing starting at a sponsor-friendly 150bp over Libor and was leveraged at 13x; the figures seems aggressive by the standard of today's deal with 3.5x gearing, but the leverage on the proceeding ports acquisitions, by other sponsors, that year rose deal-by-deal up to multiples of more than 20x. Those latter deals are now suffering major problems as a result of the decrease in trade, and many are believed to have required significant equity bailouts. In the meantime, Ports America has been quietly expanding.
Uses of funds and revenue sharing
As well as the upfront payment to MdTA, the proceeds of the bonds will fund the continued operation of existing Seagirt terminal assets, which include three berths, seven container cranes, and 12 gantries. PAC will also build a fourth berth with the capacity to accommodate post-Panamax carriers (which can accommodate between 4,000 and 8,000 twenty-foot equivalent units, or TEUs), and will also install four new post-Panamax cranes. This expansion must be completed by July 2014 under the terms of the concession agreement, though the PAC has mandated McLean Contractor Company to complete the developments by 2012, and should not affect operations in the existing berths. The construction is expected to cost US$98m, which will be funded from the Series B debt lien and an equity contribution.
Highstar's Lee also estimates that the concession and related building development will bring 2,700 new permanent jobs to Baltimore, and an additional 3,000 contracted construction jobs.
Aside from the construction contract, there is no foreseeable major capital expenditure required at the terminal, other than in 2019 for the replacement of cranes and rubber-tired gantries.
The MdTA will use the proceeds of the concession payment to pay for improvements to Interstate-95 and US-50, the highways that serve the port area. It will also benefit from an annual payment from the concessionaire of US$3.2m annually, and a revenue-sharing agreement after year five of the concession, under which the MdTA receives US$15 per container, when volume has reached more than 500,000 containers per year. Both the annual payment and the revenue sharing sum will increase incrementally with inflation, starting at a minimum of 1.5% and capped at a maximum of 3.5%.
A new model for ports finance?
While this deal is considerably smaller in the size of its financing than its predecessors in the ports sector, the use of the concession structure protects both the MdTA and the sponsor company from volume risk. The reduced leverage and increased cost of debt are in line with other recent US infrastructure concession financings using tax-exempt bonds, but the structure also demonstrates a more sustainable model for future ports operation transactions.
Seagirt Marine Terminal
Location: Port of Baltimore
Sponsor: Ports America Chesapeake (subsidiary of Highstar Capital)
Size: US$334m
Equity: US$75m
Debt: US$259m
Cost of debt: 5.125% (25-year notes); 5.375% (15-year notes); 5.75% (10-year notes)
Bookrunners: Goldman Sachs (senior manager); Citi and Bank of Montreal (co-senior managers)