Macquarie rarely goes for any deal where there is not a large amount of upside, and the decision by Macquarie Korea Infrastructure Fund (MKIF) to take a 30% stake in Busan New Port Container Terminal (BNPCT) seemed an unlikely partnership. Phase 2 and 3 of the wider Busan New Port project had been written off by many as blind ambition over economic reality, given its lack of initial traffic.

But MKIF's first investment in the South Korean port sector may be a safer bet than many in the market initially anticipated and may provide a healthy return, because of the sub-debt it is supplying to the project.

The overall Busan New Port plan is a W9.2 trillion ($9.4 billion) expansion and relocation of cargo shipping operations from the existing port to the new port 25km away, with 30 new berths to be built between 2005 and 2011. The existing port is to be redeveloped to house commercial and logistics centres, along with a leisure park, international passenger terminal and a cultural/exhibition centre.

Busan New Port Phases

Phase       Operator        Start of operations         Berths
1-1            DPW            2006                             3
1-2            DPW            2007                             7
2-1            Hanjin           2009                             4
2-2            Hyundai        2010                             4
2-3            BNPCT        2012                             4
2-4            Ssangyong     2101                            3
2-5            –                   –                                  5

Two years after the launch, and with very little traffic in that time, Busan New Port is picking up business. Last year Maersk Line shifted more than 700,000 teu from the old port to Busan New Port phase 1, the DP World-operated Pusan Newport Co, Maersk joins Mediterranean Shipping Company, CSAV, ZIM, Emirates and United Arab Shipping Company at the DP World facility. And in 2009, Hanjin and Hyundai will move to adjacent New Port terminals.

Busan Port Authority has also started investing overseas in ports with the potential to funnel cargo back to Busan. December 2007 saw its first investment – $109 million – in the port of Nakhodka in eastern Russia. A second investment, in southern Vietnam, is in the offing.

Consequently, the overall Busan New Port plan is beginning to have the desired effect and its supporters have indicated that they are willing to spend to ensure success.

The latest deal – Phase 2 and 3 of Busan New Port – is a 29-year concession from South Korea's Maritime Affairs and Fisheries Ministry (subject to South Korea's Private Participation in Infrastructure (PPI) Act) to design, build, finance and maintain four 50,000-ton berths in a 1,400m-long terminal with an annual capacity of 2.7 million teu. The concession comes with termination support payments but there are no government revenue guarantees – a past fixture of Korean PPI deals.

Total project cost is W948 billion ($970 million) – if a W55 billion capital expediture facility is not used – and construction is expected to take 48 months with an operational target date of early 2012.

With a 30% stake, MKIF has the largest holding in BNPCT, which also features Hyundai Development, Bouygues Travaux, Busan Port Authority, Kukje Transportation, KCTC, CMA CGM Group and Korea Marine Transport as shareholders. MKIF also has super pre-emptive rights over all equity sales until its holding reaches 39%.

Co-arranged by Kookmin Bank (also sole bookrunner) and Shinhan Bank, with National Agricultural Cooperation Federation and National Federation of Fisheries Cooperatives as arrangers, the Phase 2 and 3 debt financing comprises W533.9 billion of 20-year senior debt, a 12-year capex facility of W55 billion, that can be used to buy additional equipment, and an W11 billion revolving credit. The unconfirmed margin on the loan is in the region of 60bp.

Kookmin and Shinhan took W200 billion each of the debt, with the remainder taken by the arrangers.
In addition to funding its participation with W66.4 billion of equity – W12.85 billion of which was advanced to BNPCT at financial close of MKIFs investment on 21 January – MKIF is supplying 100% of the W193 billion sub-debt to BNPCT which will drawn down in stages during the construction period.

The 25-year sub-debt is priced at a fixed 10% during construction, rising to 12% during operations. The loan amortises over the last five years of its tenor and MKIF has an option to sell down if BNPCT is performing strongly.
Construction and operational risk on the project is fairly minimal – construction risk is covered by fixed-price turnkey contracts and the port operation is outsourced to experienced port operators, all part of the BNPCT consortium.

The deal is accretive to MKIF both in terms of yield on the sub-debt and internal rate of return. And there is also the upside from a potential refinancing, a stronger container tariff market and sell down of the sub-debt.

But while the deal is a good one and 25% of all Busan traffic is accounted for by investors in Busan New Port, there is still a potential risk that no amount of pumping cash into port investments abroad by the BPA can mitigate. Busan has to compete with the major Chinese ports, which last year moved more than 100 million teu.

Busan New Port Container Terminal
Status: Financial close debt and equity February 2008
Description: W948 billion port expansion financing
Sponsors: MKIF, Hyundai Development, Bouygues Travaux, Busan Port Authority, Kukje Transportation, KCTC, CMA CGM Group, Korea Marine Transport
Co-arrangers: Shinhan Bank, Kookmin Bank
Arrangers: National Agricultural Cooperation Federation and National Federation of Fisheries Cooperatives
Sub-debt: MKIF
Financial advisory: Shinhan Macquarie
Lender legal counsel: Lee & Ko
Sponsor legal counsel: Kim & Chang