Retail syndication is underway for the $1.88 billion debt financing for the acquisition of four Orient Overseas International Ltd (OOIL) ports by Ontario Teachers Pension Plan (OTPP). The $2.35 billion acquisition is the latest in a burst of activity in the sector. The deal is the largest of the last two years in the hemisphere, and the first to blend project and leveraged financing techniques, particularly in its pricing structure.

RBS, as administrative agent, and RBC, as syndication agent, are the joint lead arrangers on the deal, and launched general syndication in late February. Of the 14 banks that were approached, 7 sub-underwriters committed pro rata: BNP Paribas, Bayern LB, CDP Quebec, Caja Madrid, Commonwealth Bank, Depfa, Dexia and Nord/LB. Two further banks, Calyon and Scotia, also joined at the retail level, and pre-secured their participation at the syndication stage. Retail commitments are due by the end of the month.

The $1.88 billion equivalent debt is divided into 3 tranches; a senior term loan of $1.58 billion, a $250 million capital expenditure loan, and a $50 million revolver. The term and capex debt will be syndicated, while the lead arrangers are sole providers of the revolver.

The term debt is divided into a $480 million US dollar loan, part of which was drawn at close on 10 January, and part of which will be drawn when the borrower receives a final approval, and C$1.3 billion (equivalent to $1.1 billion) in Canadian dollar debt. The split between the two currencies is a product of the relative size of the respective Canadian and US port operations, which receive their revenues in the two currencies.

The capital expenditure loan, to be used for improvements and developments at the ports, is divided into a $85 million US dollar piece, with the remainder funded in Canadian dollars. Likewise, the revolver is split into $20 million funded by RBS and $30 million funded by RBC in Canadian dollars. This currency arrangement follows the advice of OTPP's tax advisers, since the corporate tax rate is higher in Canada than in the US.

OOIL was paid entirely in US dollars, so the sponsor had to convert the Canadian sections of the loan upon receipt. There are three borrowers; GCT Terminals, a holding company which is the subject $200 million of the US debt, Consolidated Terminals, LLC, which took the remaining $280 million of the US debt, and TSI Terminal Systems Inc. which has the full $1.1 billion of Canadian debt. Consolidated Terminals and TSI Terminals are reciprocal guarantors.

All three tranches have a 7-year tenor. The debt features minimal amortisation, with initial pricing on the debt at 140bp over Libor, and a maximum leverage ratio of 13.5x. As the leverage reduces, the pricing also reduces on a grid. The starting margin of 140bp over Libor will stand until 30 June 2007, and then will depend on a test of covenants every 6 months after financial close. The pricing will be based on a debt to Ebitda ratio. If the leverage reduces to 11x, the pricing drops to Libor plus 130bp, and continues to reduce at a similar ratio. The commitment fee is 35% of the applicable margin on any undrawn debt.

The assets covered by the acquisition are the NYCTI container terminal on Staten Island, New York, the Global terminal in Bayonne, New Jersey, and Terminal Systems, which operates the Deltaport and Vantern port facilities in Vancouver, British Columbia. The acquisition of the New York terminal is still pending the approval of the Port Authority of New York and New Jersey. The Port Authority is understood to be looking for a payment to compensate it for work done at the site, and has extracted a payment from another buyer, AIG Highstar, which was obliged to pay $83 million to the Port Authority to secure the purchase of the Newark New Jersey container terminal. This figure has been earmarked to pay for redevelopment at the Newark terminal.

The boom in the US ports acquisitions market is due in part to the growth in traffic volumes, at a rate of 10% to12% per year over the last 10 years, and a projected growth of 8% to10% per year over the next decade. The ports in this particular acquisition are appealing due to their size and the rapid growth in traffic volume, as well as being in prime locations on both east and west coasts.

The four assets collectively handled 1.331 million twenty-foot equivalent container units (TEUs) in the first half of 2006, which was an increase of 17% from the same period in 2005. The combined revenue from cargo was $234.9 million, with a rise in operating profit of 46.5% to $35 million. The Vancouver ports accounted for 876,000 of the TEUs and $151.7 million of the total revenue. The Global terminal in New Jersey is the third-largest container handler in the US, and is the dominant port in the North Atlantic region, with close to a 50% share of the market.

An appealing aspect of the New Jersey terminal is that its operations can be expanded, since its freehold is part of the acquisition, unlike the New York terminal, which is leased. However, despite its size and capacity, the Global terminal suffered adversely from the loss of P&O Nedlloyd, which stopped using the port in 2005. Traffic volume dropped 13% in the first half of 2006, and though revenue remained unchanged at $35.4 million, operating profits fell 64%.

The New York terminal is the state's only major container facility, but saw a lower increase in volume than the other assets due to its proximity to the Arthur Kill channel, which is periodically dredged, causing disruption to the port's commercial operations. However, traffic increased 6.7% to 255,000 TEUs, which accounted for $47.6 million of the total revenue. The operating profit increased by 9.9%.
The ports sector is presently exciting high bid levels from asset-hungry infrastructure funds. OTPP beat teams led by Macquarie, Morgan Stanley and Goldman Sachs in the bidding for this acquisition.

GCT Terminals
Status: Closed January 10, retail syndication underway
Size: $2.35 billion
Location: US and Canada
Description: Acquisition of 4 container terminals
Sponsor: Ontario Teachers Pension Plan
Debt: $1.88 billion
Equity: $885 million
Mandated lead arrangers: RBC and RBS
Tenor: 7 years
Margin: Starting at 140bp over Libor, changing on a debt to Ebitda ratio
Financial adviser to sponsor: HSBC
Legal counsel to sponsor: Sullivan & Cromwell
Legal counsel to lenders: Linklaters
Financial adviser to seller: UBS
Legal counsel to seller: O'Melveny & Myers