The last six months have witnessed a slew of acquisitions of container terminals and associated services in the US and Canada. The deals have sparked some large, hotly-contested financing mandates, and evolved some interesting hybrid leveraged/project financings. But whether assets will continue to come to market remains to be seen. There is a substantial amount of equity chasing ports, which has driven up valuations, and has put more operations in play than in previous years. But political factors are still capable of choking off the supply of assets, and leverage levels on borrowers alarm some potential lenders.

But global trade patterns also play a huge part in the financing process, and vagaries in shipping decisions have a considerable impact on the facilities' risk profile and the revenue streams. But lenders, particularly those banks prominent in arranging mandates, say that the assets are fundamental infrastructure, and point to few signs of weakness in the market. But since ports, particularly in the US, hold their value primarily as ongoing operations, the use of leveraged financing has been notable.

From terminals to services businesses

The two most recently announced deals are acquisitions by AIG Highstar Capital of AMPORTS' automotive processing facilities from private equity fund Lincolnshire Management, and of MTC Holdings, an independent ports-operating and stevedoring company, from private individual Christopher Redlich. The financings for these deals have not yet closed, nor have any of the agreed purchase prices been formally disclosed. However, these acquisitions demonstrate a perceptible shift in the ports market towards ancillary services, following an earlier wave of container terminal sales, one of which involved Highstar.

The assets in the AMPORTS deal are free-held facilities within the ports of Jacksonville, Florida; Benicia, California; Baltimore, Maryland; Brunswick, Georgia and locations on both coasts of Mexico. MTC Holdings has a presence in 32 ports across the continent, and Highstar is understood to be merging its three recent acquisitions and exploiting the potential efficiencies. When considered along with the other recent Highstar deal, the $955 million acquisition of P&O Ports North America (POPNA), P&O's seven US container terminals, from DP World, which closed in March, the buyer now has a strong hold in the market. Whether the financing for the second two deals will follow the container terminals' structure remains to be seen.

The POPNA deal is one of four container terminal acquisitions in North America since the beginning of the year. The first was Ontario Teachers Pension Plan (OTPP)'s purchase of four terminals from Orient Overseas International Ltd (OOIL). RREEF, Deutsche Bank's infrastructure fund, acquired Maher ports' two terminals in Elizabeth, New Jersey and Prince Rupert, British Columbia. The most recent asset to change hands is the Montreal Gateway terminal, which Morgan Stanley's infrastructure fund bought from TUI's Hapag-Lloyd. The financings for these deals are remarkably similar in structure, if not in size, and have featured elements closer to leveraged financing than to the project financing models of other transport infrastructure assets. The preferred measure of leverage is a debt to Ebidta ratio, rather than a traditional debt service coverage ratio. This move towards leveraged financing is preferable for sponsors because it offers borrowers greater flexibility and limited covenants. The pricing, however, is more like traditional project financing over a longer term.

The OOIL financing, the first widely-syndicated ports financing this year, was a $2.35 billion acquisition for four major ports; two in the port of New York and New Jersey, two in Vancouver. The debt of $1.88 billion was arranged by RBS and RBC in two currencies, of three tranches, each with a tenor of 7 years. (Search "OOIL" for full details.) The margin was 140bp over Libor as a starting point, then dependent on a debt to Ebitda grid. Leverage started at 13.5x. If the leverage reduces to 11x, the pricing drops to 130bp over Libor, and continues to reduce at a similar ratio. The commitment fee is 35% of the applicable margin on any undrawn debt.

AIG Highstar's POPNA deal closed shortly afterwards, and was similarly structured. The $955 million acquisition debt was divided into a $575 million term loan, a $120 million delayed draw term loan for the Baltimore asset, a capex facility of $35 million, a $125 million letter of credit that supports the bond debt of the Newark terminal, a letter of credit of $50 million to support the bond debt at several of the other assets, and a $50 million working capital revolver. Pricing on this debt started at 150bp over Libor until the end of 2008, then also works on an Ebidta grid. Leverage also started at around the 13x mark, with pricing remaining at 150bp until leverage falls to 8x. if leverage is at 8.5x, pricing remains at 150; if it falls to 8x pricing is 135bp over Libor; 7x = 120bp; 6x = 105bp; 5x = 90bp; less than 5x = 75bp.

Syndication is currently underway for the Montreal Gateway deal. The acquisition price was approximately C$580 million ($524 million) for an 80% stake in the two assets, container terminals on the St Lawrence River. RBS is sole lead arranger and bookrunner on the C$360 million debt, which breaks down into a senior facility of C$306 million and a capital expenditure facility of C$35 million. Fifteen banks were offered commitments at C$15 million or C$25 million each. The tenor on this deal is slightly longer, at 10 years. The DSCR is higher than in the other deals at 1.6x (OOIL and Maher are thought to start around 1.25x), with debt to Ebidta projected at 11x for the first year. Pricing starts at 120bp over Libor then works on a grid. When leverage falls to between 9x and10x, pricing will be 110bp over Libor; between 8x and 9x = 90bp; between 7x and 8x = 75bp; and under 7x = 60bp.

The financing for the Maher deal has not yet closed, though the acquisition price is thought to be in the region of $1 billion. RBC is leading the financing. The assets consist of a port in Elizabeth, New Jersey, which is 50% larger than its nearest competitor's, and a port in British Columbia, for which construction is underway.

What's left to buy up?

In the recent container terminal deals the assets have been in prime locations; in highly-populated commercial areas such as New York and Vancouver, where the inter-modal costs are lower due to the proximity to intended consumers, and also Montreal, which has easy access to the US Midwest. The ports in Long Beach and Los Angeles are operating at capacity, and though there is marginally more space for expansion on the west coast, new projects of similar sizes are unlikely, and would not be conducive to easy overland transport.

Port assets should be able to provide pension funds and insurance companies with a reliable source of income, even if the market weakens. Nevertheless, the required equity levels on port financings, according to bankers active in the market, is around 30% to 40%. Since toll roads can achieve equity contributions of as little as 10%, market sentiment still factors in the market risk attached to ports.

Alec Montgomery, managing director in RBS' infrastructure finance group in New York, notes that there is an "increasing trend of containerisation of trade over the last twenty years, with volumes increasing by 8% to 10% per year". Container terminals are even more of a stable bet for investors, as twenty-foot equivalent units (TEUs) are quickly becoming the preferred transportation for imports and global trade; they can be stacked and stored efficiently, and even if they are not full to capacity, their storage is still more cost effective than, for example, break-bulk freight. Montgomery also cites the consistently increasing outflow of trade from Asia to North America as a contributor to the values of port assets. If the containers are delivered to the ports near to centres of commerce, the costs are further reduced. The New Jersey assets, therefore, are particularly appealing, since the mainland road and rail systems are very accessible to the port, which is considered a gateway to the east coast.

Shippers can ensure guaranteed access to offloading facilities, much like an airline monopolising an airport gate. Though these contracts are not as strong as a take-or-pay agreement, in that the shippers only pay if they dock, it allows buyers and lenders to more safely predict revenue flows. Shipping strategies are fundamental to understanding the value of the ports assets, since shippers will need to decide between multiple stops on a coastline, versus a single stop, and keep inter-modal costs in mind at the same time. According to one banker familiar with the market, "where the shippers go, the infrastructure funds will follow, and so long as it is more cost-effective to make a single stop in an accessible port, the ports will retain an increased value."

Automotive processing terminals benefit from the same forces, and could benefit from being repurposed as container storage facilities. They are aesthetically similar to parking lots, but with technicians on hand customising vehicles. But the vast storage of cars in coastal locations is not as space-efficient as the TEUs' stackable, packable nature, since TEUs can be stacked vertically and at high density. Cars, however, can feasibly be more easily contained at cheaper locations away from the prime coastal ports, and moving them by a roll-on/roll-off mechanism transfer to other modes of transportation is less cumbersome than moving containers by crane. It costs $30 per container per time, and some terminals handle in the region of 3 million containers per year.

AMPORTS might benefit from a repurposing, since it holds its land free-hold, and this land was part of the acquisition. The recent container terminals covered by recent acquisitions, do not own their land, but lease it from the relevant port authorities. Considering the amount of negotiation involved in persuading port authorities to approve sales, owning freehold is no small benefit. But automotive processing operators will only convert to container operators or sell land to container operators if the returns are much better than those from importing cars, and at present returns on this business are stable, if not stellar.

Arduous approvals

The politics surrounding the ports acquisitions is also an important factor in assessing these deals. The sale of POPNA arose when the Federal government balked at its acquisition by DP World, an entity owned and controlled by the royal family of Dubai. However, the sale of POPNA then waited on approval from the Port Authority of New York and New Jersey, which wanted to be compensated for forthcoming improvements at the Newark terminal. The fee paid to the Port Authority for the authorisation of the transfer last of the four assets was in the region of $50 million, and held up financial close by some time.

There has been a similarly tortuous process of negotiation on the OOIL deal, and there are rumours that the transfer of Maher's Elizabeth terminal may also require a payment. On the POPNA deal, the Port Authority payment reflected capex that Highstar had already factored into its spending plans, and the two simply agreed that the Port Authority would do this work rather than Highstar.

However, sources close to the other deals say that the Port Authority views the payments as retroactive reimbursement for works already completed at the time of sale, but that would benefit the equity. While the Port Authority would view this as fair compensation for public funds sunk into works that benefit the private sector, buyers and lenders familiar with the process see the demands for payment as highly opportunistic. The Port Authority has refused to answer Project Finance's questions regarding its approach to the process.

Nevertheless, the Port Authority has recognised that the private equity buyers' ability to maximise assets' capital structure has vastly increased their value. For a family-run ports businesses, such as Maher, the timing could not be better. Rather than enter into a partnership and share responsibility for the maintenance and operation of the business, which had been the Maher family's original intention, it decided to sell the entire operation while the market is booming, but with the proviso that operations and personnel remain constant. RREEF has acquired a fully operational, successful and expandable asset, and the rumoured billion-dollar price-tag is on a par with the other comparable deals.

Though not syndicated at the time of going to press, RBC has apparently secured two co-arrangers on the Maher acquisition financing, according to sources familiar with the process. This syndication will likely take the shape of the OOIL and POPNA deals in terms of financing. Banks involved in the previous syndications, which also hope to secure involvement in Maher, suggest that any great difference in the structure and pricing would be viewed suspiciously, given the ready availability of the two earlier deals as benchmarks. The Maher financing is also pending Port Authority approval.

While such valuations benefit from earlier precedents, some observers are more cautious. In a recent analysis on infrastructure finance conducted by Standard & Poor's, Michael Wilkins looked at whether the market can sustain such a growth in this sector, or whether the trend is coming to an end. The report says that some "infrastructure deals are becoming increasingly highly leveraged", reflecting "a pricing bubble caused by the wave of new funds chasing limited assets", and that with "debt to Ebitda multiples in recent deals ranging from 12x to 30x", the "sector is in danger of suffering from the curse of overvaluation and excessive leverage".

Whether these recent activities in ports infrastructure are indicative of a continuing trend remains to be seen. Many of the major terminals, especially in the North American market, have already changed hands, and there is no indication that any more of the publicly-held assets will come to market, again highlighting the value of the recent acquisitions to their buyers. But the probability of more ports-related deals coming to market is high; the two most recent Highstar deals have demonstrated that there is more to ports acquisitions that the facilities themselves.