Highstar Capital's Ports America has closed the $334 million financing for its acquisition of the 50-year concession for, and upgrading of, the Seagirt container terminal in Maryland. The $249 million debt financing is one of the first bond deals for a US ports concession. It was structured to allow the privately-held project company to fund its concession payment with tax-exempt debt.

The financial adviser to the sponsors, Goldman Sachs, was senior bookrunning lead manager on the bonds, with Citi and BMO as senior managers. The bonds were split into two tranches – $167 million in series A transportation facilities project bonds, $82 million in series B terminal project bonds, which brought in $245 million in proceeds after an original issue discount. The two tranches rank pari passu, with the larger tranche going towards the concession payment, fees, and deposits to reserves, and the smaller B tranche for the funding of a capex reserve.

Both tranches have serial maturities between 2020 and 2035, with the 2020 bonds carrying a coupon of 5.125% (and priced to yield 5.25%), the 2025 bonds a coupon of 5.375% (and yielding 5.5%) and the 2035 bonds with a coupon of 5.75% (for a yield of 5.875%). The debt, which begins amortising in 2016, was six times oversubscribed.

Nippon Yusen Kaisha's Ceres Global, which had backing from Alinda Capital, declined to submit a competing bid shortly before the 9 November 2009 deadline. The winning bidder had the advantages of incumbency, since P&O North America, acquired by Highstar in 2007, has operated the terminal since it opened in 1990, and has had a presence in Baltimore for 88 years. A direct comparison between the two bids would have been difficult, though Highstar's assumption until the last moment was that Ceres was still in the running.

The bonds had to take account of existing relationships between the grantor, the Maryland Port Administration, and both the operator and shippers, between the current operator, Ports America Baltimore, and shippers, and between the operator and the concession company, Ports America Chesapeake. The administration had leased the terminal from the Maryland Transportation Authority.

The tax-exempt financing conduit for the series A bonds, the Maryland Economic Development Corporation, is issuing the bonds at the request of the authority. The concession fee is structured as the port administration's payment to the authority for the terminal. While the concession company is liable for debt service, it never touched the proceeds of the bond issue.

The bonds are split into two series because they are issued under different provisions of the tax code. The proceeds of the series A bonds, though in effect a concession payment, are earmarked towards road improvements in the state, and debt service must be routed through the port authority, while ensuring that the authority is not liable for debt service and cannot interfere with the flow of funds. The series B bonds are sold under a tax code provision that allows private operators to use tax-exempt bonds for improvements to docks and wharves, and their debt service path is shorter.

The Maryland Port Authority offered the allocation to all bidders on the concession, which acted as an incentive to bidders to go forward during an unsteady time in debt markets. Other concession processes have foundered, in whole or in part, on the rocks of illiquid debt markets. Highstar funded another recent ports concession, the $150 million Oakland container terminal from March 2009, with equity.

Under the lease the sponsor gets access to all of the revenues from the terminal's operation, though it shares revenues with the administration of $3.2 million per year, indexed to inflation, and $15 per container above half a million containers per year. The state also promises not to build any competing facilities for at least 15 years, or until Seagirt reaches 80% of its design capacity. Not coincidentally, the revenue-sharing is set to kick in just as the non-compete expires, which will encourage the administration to deal with Seagirt sensitively.

The sponsors will build a new $98 million fourth berth, with a depth of 50 feet, to accommodate post-Panamax container vessels. The engineering, procurement, and construction contractor for the berth is McLean Contracting Company. The contract calls for the berth to be ready by 12 January 2012 and has a hefty set of liquidated damages if this date is not met.

Moody's rated the bonds Baa3, noting that the financing is vulnerable to volume risk, competition, and the dependence of the concession on two shippers, MSC (37%) and Evergreen (27%). It also noted, however, that the city of Baltimore and surrounding region is home to a large number of the shippers' clients, and that the deal's sponsor base case debt service coverage ratio is 2.24x. Ports America will need to realise some cost savings from rationalising its container operations but the move has the support of the port's unions.

One complex part of the financing was separating the Ports America Baltimore (PAB) subsidiary, which holds some existing terminal contracts, from the Ports America Chesapeake project company. PAB is a guarantor of Ports America Holdings' acquisition debt, and has to retain its contracts with shippers under existing bank debt. But lenders to the holding company have recognised that the concession company is separate, and the concession company has an independent director. Getting the holding company's lenders' agreement involved explaining that giving up a pledge over the concession was a small price to pay for access to a greater dividend flow from it.

The deal is structured conservatively, to take account for a tougher line from investors and agencies on sponsors' revenue growth expectations. Sponsors for all infrastructure assets have had a tougher time conjuring up large upfront payments, but governments, if they can identify a destination for concession proceeds, among other items of tax structuring, and can accept deferred revenue sharing arrangements, might be able to adapt series A's tax-exempt debt structure to other asset types.

Ports America Chesapeake
Status: Closed 7 January
Size: $334 million
Location: Baltimore, Maryland
Description:
Concession for Seagirt container terminal
Grantor: Maryland Port Administration
Issuer: Medco
Sponsor: Highstar Capital Fund III, LP
Equity: $75 million
Debt: $245 million
Bookrunner and adviser: Goldman Sachs
Senior managers: Citigroup, BMO
Bond counsel: Miles & Stockbridge
Sponsor legal: Cleary Gottlieb
Legal counsel to underwriters: Orrick
MDOT counsel: McKennon Shelton & Henn
MPA advisers: PFM, Laurene B Mahon (financial), K&L Gates (legal), AECOM (technical) Martin Associates (market)