Syndication of the $625 million debt for Marine Terminals Corporation (MTC) closed on 2 July and, despite the unusual nature of the asset (it includes neither land nor concession), 25 banks participated.

AIG Highstar agreed to acquire the business from Christopher Redlich in May for around $900 million in a private sale. The business comprises operating and stevedoring services in 32 ports – mainly on the west coast of the US in Washington, Oregon and California, but also on the east and gulf coasts. Linklaters acted as counsel to the lender, Cleary Gottlieb was counsel to the borrower, and Moffatt & Nichol was consultant.

Lead arranged by Royal Bank of Scotland (RBS), the seven-year facility features a $540 million term loan, a $50 million revolver, and $35 million of second lien debt. Six banks committed in the region of $70 million (these include Dexia, Nord LB and BNP Paribas), eight came in at $40 million and 11 took $25 million or less.

The initial margin was wider than other recent US ports deals, starting at 185bp over Libor and linked to a leverage grid which starts at 6x: When leverage falls to between 5x and 6x pricing drops to 170bp, and below 5x pricing falls further to 140bp.

The debt also features an amortising bullet until maturity and a 100% cash sweep while leverage is at 6x which reduces to a 50% sweep when leverage falls below 6x.

The business involves stevedoring (cargo handling), and operating services, such as maintenance, warehousing, administrative and technological services; essentially, the investment is in labour broking. With human expertise and equipment as the central commodities in the transaction, the assets are less tangible than with the other deals.

The assets do not include any land, either owned or leased, which differs from AIG Highstar's other recent ports-related acquisitions. Highstar bought P&O's seven ports/container terminals in North America (POPNA) from DP World in March for $955 million. Many of these are leased from port authorities. The POPNA deal sat neatly in the infrastructure financing space, with pricing starting at 150bp over Libor and initial leverage at 13x – similarly structured to other terminal deals.

Despite having no tangible assets the MTC deal is described by bankers as a leveraged financing with the pricing benefits of infrastructure investment models. Highstar views MTC as complementary to POPNA – in effect the pair are east- and west-coast equivalents – and has persuaded lenders that the combined portfolio must be viewed as infra-flavour debt and MTC priced accordingly.

Agree or disagree with the logic, the reality is that in the MTC deal there are no long-term concessions in place at any of MTC's terminal locations with either port authorities or shipping companies. This factor increases the risk of the deal significantly, and is rumoured to have dissuaded a number of banks from participating in syndication.

The whole operation is dependent upon the consistent renewal of contracts of varying lengths by the shipping companies that use the 32 facilities in which MTC operates. These contracts are in the form of joint venture arrangements and are short-term – between only one and three years.

Furthermore, though instances of cancellation are rare, the service agreements between MTC and the shipping companies can be cancelled with only 90 days notice. Both of these factors increase the risk on the debt, as there is no provision for contract termination, and the maturity of the debt (seven years) is longer than all of the contracts.

However, though there are no competition clauses in place on the deal, the likelihood of the sudden emergence of a rival service provider is considered by all parties to be remote: Switching costs – the technological and materials costs that are incurred when a shipping company changes service provider – are substantial, as is the operational upheaval to shippers.

RBS' research suggests that the history of contract renewals, and growth of MTC in previous years is a strong indicator for future revenue streams. Contracts with major Asian shipping companies such as Evergreen, Yang Ming, Hanjin and China Shipping are long-established. MTC has maintained many of the relationships with these shippers for decades. However, the implications of the uncertain long-term revenues are evident in the pricing of the debt.

MTC Holdings

Status: Closed 2 June 2007
Size: Approximately $900 million
Location: US
Description: Acquisition of ports service provider, with presence in 32 facilities
Sponsor: AIG Highstar
Debt: $635 million
Mandated lead arranger: RBS
Tenor: 7 years
Margin: Starting at 185bp over Libor, decreasing on a debt to Ebitda ratio
Legal counsel to sponsor: Cleary Gottlieb
Legal counsel to lenders: Linklaters
Consultant: Moffat & Nichol