Sill berths
Despite the fact that the latest research conducted by Drewry
Shipping Consultants shows that there are at least 270 investment
opportunities in the port and terminal industry worldwide ? and
estimates the need for an overall investment of $2.1 billion in
facilities by 2007 in Europe alone if it is to keep pace with
forecast demand ? the sector is attracting little interest in the
European project finance market.
Bankers remain unconvinced by trade forecasts, and port operators with heavy exposure to the European markets are looking far weaker than they did a couple of years ago. Tue Ostergaard, transport analyst in WestLB's Copenhagen office says: ?Some companies such as Hutchison have such large Asian operations that they look strong, but as far as the European sector is concerned there's no doubt that there's overcapacity and rates are going down. As for what terminal demands are forecast by consultants, I don't know what those guys are drinking.?
Perhaps the clearest recent example of how difficult it has become for projects to attract investment is the JadeWeserPort scheme in Germany. First announced in the heady days of the late 1990s, when year-on-year growth in container volumes was regularly above 5%, the project envisioned a giant new container terminal to be built at the former naval port of Wilhelmshaven, situated at the confluence of the Jade and Weser rivers, to provide German exporters extra terminal capacity and take pressure off Germany's existing facilities in Hamburg and Bremerhaven. And central to the development was that it would be financed by private capital, a first in the German port industry.
Politics or prudence?
That dream is now dead, a fact admitted by Bremen's port senator Josef Hattig as he sat down to sign the public launch of the JadeWeserPort (JWP) Realisation company late in January. Not a single Euro of private money would go towards construction, not a single bank or other lender had been found which was willing to even partially finance the estimated Eu440 million infrastructure costs. Hattig said that talks had been held with private investors but without success because of what he termed: ?the gap between overall economic aims and a company's individual profit requirements. Private investors need quicker returns.'
Instead, construction of the terminal is now to be funded by entirely by local taxpayers ? the state of Lower Saxony holds a 50.1% stake in JWP Realisation, and City of Bremen the remaining 49.9%. Construction is due to begin in 2005, and returns to the state-financed company will not be seen until 2009 at the earliest, when the first four berths are provisionally due to begin operations. A public tender to select an operator ? expected to stump up at least Eu300 million ($295 million) in superstructure investment, and which German stevedore EuroGate is widely tipped to win ? is due to take place later this year.
But others say Hattig's argument of private investor impatience is only partially true. Some argue that Germany might not need a third main container port, while others point to the fact that JWP's potential customers, container shipping lines, are in the middle of the worst recession they have ever experienced ? although this may be an advantage according to Sigmar Gabriel, Lower Saxony's prime minister, who said: ?We are not leaving the business of big ships to Rotterdam and Antwerp. Thanks to this financing model, the port will be much cheaper than any other big port in Europe.?
Asked to comment on this remark, one German banker said: ?But that's precisely why no one wanted to subscribe to the project. This is a political decision, they'll build a port anyway, whether they've got clients signed up for it or not, but no lender is interested if they've got no customers lined up. No one believes that incremental container traffic growth will fill the terminal, so they'll need to poach shipping lines from another port, and there's no guarantee that will happen.? The subtext to this is a long-running rivalry between Bremen and Hamburg. Bremen is full and cannot expand, Hamburg has just opened its new hi-tech Altenwerder terminal, and claims it can expand its capacity by three times over the next 15 years. Originally the city of Hamburg was supposed to take an equal stake in JWP, but pulled out after it claimed the money would be better spent on its own port.
Additionally the European Commission, having already slapped the German government's wrist for its high levels of public expenditure, confirmed that it will investigate the financing to see whether it breaks state-aid competition rules, which remain a grey area. A recent vademecum (ongoing guidelines) released by the EC's transport department makes the distinction between state aid for general-user facilities, which is allowed, and aid for single-user facilities, which isn't if it is deemed to distort competition. In the case of Wilhelmshaven, it is perhaps clear cut: it is intended for one operator, and it is intended to compete with existing operations for existing business. Trouble could lie ahead.
Investor nightmares becoming a reality
There are two nightmare scenarios for port investors. One is occurring down the coast from Wilhelmshaven, in Amsterdam, where a brand new container terminal, built with Eu700 million of the city's money, has been sitting empty for a full year since it was opened. Not one shipping line has moved from nearby Rotterdam, and this was what scared private lenders about Wilhelmshaven. The second fear is related, and occurred in the UK a decade ago when the new purpose-built Thamesport terminal opened to provide competition to Felixstowe and Southampton, and immediately handling rates across the UK dropped through the floor. Soon after, Thamesport's owners had had to refinance the operation entirely, and a couple of years later the loss-making business was sold to Hutchison.
The spectre of overcapacity continues to haunt the UK port market, despite the fact that freight industry is crying out for new terminal capacity to relieve chronic congestion. In the rush to cater for demand, the UK's three largest operators ? Associated British Ports (ABP), P&O and Hutchison ? have all presented plans for new container terminals. And bankers fear the ghost of Thamesport could be about to return. Andy Murphy, transport analyst at WestLB, says: ?Ideally these things would all be built over a number of years, but that doesn't look likely, and if all three go ahead you are talking about doubling UK port capacity over the next five years and there's only one way handling rates will head: south.?
At Southampton, the year-long public enquiry has just finished into Associated British Ports' proposed £600 million Dibden Bay project, with a report due to delivered in the autumn, while in London a similar procedure has just begun to examine P&O's plans to develop a £300 million container terminal at the former Shell oil refinery site on the Thames: the so-called London Gateway project. Meanwhile Hutchison has also announced its intention to develop another container terminal at Bathside Bay, adjacent to Felixstowe, as well as adding another 1 million teu capacity to its existing Languard terminal.
Dan Clague, director of transport and infrastructure at SG Hambros, says that handling rates are already coming under fire: ?All the ports are generally under pressure in terms of rates because their customers are under such pressure themselves. On continental Europe not much is happening on the infrastructure side. There has been a number of acquisitions, so companies are getting to grips with the new businesses, and as far as new infrastructure goes, shipping lines are unwilling to commit long-term in advance because their own business is currently so weak.?
In truth, most observers doubt whether all three UK projects will be given construction permission, but there is a serious possibility that at least one will involve the use of some project financing. While analysts say ABP is likely to fund its project with proceeds from existing cash flows, with additional funds coming from major shipping lines that will sign exclusive use contracts ? indeed, ABP CFO Richard Adams is adamant that the project will not proceed unless at least three major long-term contracts are in place ? P&O is expected to fund Shellhaven through a variety of means.
?P&O's capital expenditure is currently running at about £150 million a year, and its debt is rising by £50-100 million a year. If they go ahead with Shellhaven, we expect it to be funded through a mixture of debt, existing cash flows and property sales,? Murphy says. Another banker adds that with the group's container shipping division ? P&O Nedlloyd under heavy pressure ? the group may look to project financing to fund parts of Shellhaven to keep the expenditure off-balance sheet and in order to maintain its shareholder dividend.
Emerging markets the ports to call
According to Martin O'Neil, senior vice president corporate finance at Philippines-based International Container Terminal Services Inc (ICTSI), part of the problem for lenders in Europe is that the major operators themselves have reached a point where project finance has become a less attractive option. ?Quite aside from the issue that as far as new capacity is concerned, it's not entirely clear that western Europe needs it, although there is an odd situation in the UK, where a lack of capacity is forecast, there's a secondary issue for project financing in Europe now, and that's to do with the number of major facilities which are owned by such big corporations. From a capital finance perspective it's pretty easy for Hutchison Whampoa, PSA Corp and P&O to access capital through methods such as public debt. If you can get 20-year bonds at something like 70 basis points over the relevant sovereign spread, do you
really need a project finance facility?? he says.
Indeed, Hong Kong-based Hutchison set up its Hutchison Ports UK subsidiary to do precisely that, issuing a 20-year sterling bond that has financed expansions of its facilities at Felixstowe, Thamesport and Harwich. In all likelihood, it is expected follow a similar strategy if it builds Bathside Bay. ?Over the longer term public debt is cheaper and has a less restrictive covenants. On the other hand there is certain flexibility that comes with project finance, you may be able to keep it off the corporate balance sheet, and that can be useful if you've got other things you want to do as a corporation.? It also works if the operator does not own 100% of a new operation, and P&O has exploited several deals to finance construction of joint-venture operations in emerging markets such as Russia and Turkey.
And ICTSI's senior vice president for Europe, Middle East and Africa, Thomas Falknor, signalled that it may ?use a mixture of equity funding and project finance', if its goes ahead a deal currently being discussed to acquire and develop Baltic Container Terminal in the Polish port of Gdynia. The Filipino company has entered into exclusive negotiations with the port authority there as the preferred bidder ? beating AP Moller Terminals and CSX World Terminals. O'Neil qualifies the position: ?I am feeling quite comfortable that whether it's senior debt, mezzanine finance or straight equity it's not going to be difficult to fund this project. Despite the fact that over the past four or five years there's generally less money available in the emerging markets environment, with bank lending, non-bank lending and foreign loans all down, the markets have also decided that Poland is a good place to be. The sovereign risk perception is good, the zloty bank market is quite liquid, there's capital available.?
Falknor says ICTSI has little intention of even looking at possible projects in the developed world: ?The prices are much higher, the margins are much lower. Normally things such as labour costs are very high. In fact in many cases the fixed costs overwhelm your ability to make a decent margin. Basically the port business is one of the simplistic around in terms of supply and demand, but finding the right deal is hard.?
And last month, US operator CSX World Terminals showed that there is appetite for project finance deals, albeit also outside the developed world, after it secured a $195 million loan for a new container terminal at Punta Caucedo in the Dominican Republic. The loan was syndicated by Scotiabank, with Deutsche Investitions and Entwickungsgesellschaft and the IFC participating, and guaranteed by the French export credit agency Coface. The remaining $105 million of the project's costs are to be funded by equity from CSX Domincana and the Caucedo Development Corporation. Project financiers will have to continue to look outside Europe for deals in the port sector.
Bankers remain unconvinced by trade forecasts, and port operators with heavy exposure to the European markets are looking far weaker than they did a couple of years ago. Tue Ostergaard, transport analyst in WestLB's Copenhagen office says: ?Some companies such as Hutchison have such large Asian operations that they look strong, but as far as the European sector is concerned there's no doubt that there's overcapacity and rates are going down. As for what terminal demands are forecast by consultants, I don't know what those guys are drinking.?
Perhaps the clearest recent example of how difficult it has become for projects to attract investment is the JadeWeserPort scheme in Germany. First announced in the heady days of the late 1990s, when year-on-year growth in container volumes was regularly above 5%, the project envisioned a giant new container terminal to be built at the former naval port of Wilhelmshaven, situated at the confluence of the Jade and Weser rivers, to provide German exporters extra terminal capacity and take pressure off Germany's existing facilities in Hamburg and Bremerhaven. And central to the development was that it would be financed by private capital, a first in the German port industry.
Politics or prudence?
That dream is now dead, a fact admitted by Bremen's port senator Josef Hattig as he sat down to sign the public launch of the JadeWeserPort (JWP) Realisation company late in January. Not a single Euro of private money would go towards construction, not a single bank or other lender had been found which was willing to even partially finance the estimated Eu440 million infrastructure costs. Hattig said that talks had been held with private investors but without success because of what he termed: ?the gap between overall economic aims and a company's individual profit requirements. Private investors need quicker returns.'
Instead, construction of the terminal is now to be funded by entirely by local taxpayers ? the state of Lower Saxony holds a 50.1% stake in JWP Realisation, and City of Bremen the remaining 49.9%. Construction is due to begin in 2005, and returns to the state-financed company will not be seen until 2009 at the earliest, when the first four berths are provisionally due to begin operations. A public tender to select an operator ? expected to stump up at least Eu300 million ($295 million) in superstructure investment, and which German stevedore EuroGate is widely tipped to win ? is due to take place later this year.
But others say Hattig's argument of private investor impatience is only partially true. Some argue that Germany might not need a third main container port, while others point to the fact that JWP's potential customers, container shipping lines, are in the middle of the worst recession they have ever experienced ? although this may be an advantage according to Sigmar Gabriel, Lower Saxony's prime minister, who said: ?We are not leaving the business of big ships to Rotterdam and Antwerp. Thanks to this financing model, the port will be much cheaper than any other big port in Europe.?
Asked to comment on this remark, one German banker said: ?But that's precisely why no one wanted to subscribe to the project. This is a political decision, they'll build a port anyway, whether they've got clients signed up for it or not, but no lender is interested if they've got no customers lined up. No one believes that incremental container traffic growth will fill the terminal, so they'll need to poach shipping lines from another port, and there's no guarantee that will happen.? The subtext to this is a long-running rivalry between Bremen and Hamburg. Bremen is full and cannot expand, Hamburg has just opened its new hi-tech Altenwerder terminal, and claims it can expand its capacity by three times over the next 15 years. Originally the city of Hamburg was supposed to take an equal stake in JWP, but pulled out after it claimed the money would be better spent on its own port.
Additionally the European Commission, having already slapped the German government's wrist for its high levels of public expenditure, confirmed that it will investigate the financing to see whether it breaks state-aid competition rules, which remain a grey area. A recent vademecum (ongoing guidelines) released by the EC's transport department makes the distinction between state aid for general-user facilities, which is allowed, and aid for single-user facilities, which isn't if it is deemed to distort competition. In the case of Wilhelmshaven, it is perhaps clear cut: it is intended for one operator, and it is intended to compete with existing operations for existing business. Trouble could lie ahead.
Investor nightmares becoming a reality
There are two nightmare scenarios for port investors. One is occurring down the coast from Wilhelmshaven, in Amsterdam, where a brand new container terminal, built with Eu700 million of the city's money, has been sitting empty for a full year since it was opened. Not one shipping line has moved from nearby Rotterdam, and this was what scared private lenders about Wilhelmshaven. The second fear is related, and occurred in the UK a decade ago when the new purpose-built Thamesport terminal opened to provide competition to Felixstowe and Southampton, and immediately handling rates across the UK dropped through the floor. Soon after, Thamesport's owners had had to refinance the operation entirely, and a couple of years later the loss-making business was sold to Hutchison.
The spectre of overcapacity continues to haunt the UK port market, despite the fact that freight industry is crying out for new terminal capacity to relieve chronic congestion. In the rush to cater for demand, the UK's three largest operators ? Associated British Ports (ABP), P&O and Hutchison ? have all presented plans for new container terminals. And bankers fear the ghost of Thamesport could be about to return. Andy Murphy, transport analyst at WestLB, says: ?Ideally these things would all be built over a number of years, but that doesn't look likely, and if all three go ahead you are talking about doubling UK port capacity over the next five years and there's only one way handling rates will head: south.?
At Southampton, the year-long public enquiry has just finished into Associated British Ports' proposed £600 million Dibden Bay project, with a report due to delivered in the autumn, while in London a similar procedure has just begun to examine P&O's plans to develop a £300 million container terminal at the former Shell oil refinery site on the Thames: the so-called London Gateway project. Meanwhile Hutchison has also announced its intention to develop another container terminal at Bathside Bay, adjacent to Felixstowe, as well as adding another 1 million teu capacity to its existing Languard terminal.
Dan Clague, director of transport and infrastructure at SG Hambros, says that handling rates are already coming under fire: ?All the ports are generally under pressure in terms of rates because their customers are under such pressure themselves. On continental Europe not much is happening on the infrastructure side. There has been a number of acquisitions, so companies are getting to grips with the new businesses, and as far as new infrastructure goes, shipping lines are unwilling to commit long-term in advance because their own business is currently so weak.?
In truth, most observers doubt whether all three UK projects will be given construction permission, but there is a serious possibility that at least one will involve the use of some project financing. While analysts say ABP is likely to fund its project with proceeds from existing cash flows, with additional funds coming from major shipping lines that will sign exclusive use contracts ? indeed, ABP CFO Richard Adams is adamant that the project will not proceed unless at least three major long-term contracts are in place ? P&O is expected to fund Shellhaven through a variety of means.
?P&O's capital expenditure is currently running at about £150 million a year, and its debt is rising by £50-100 million a year. If they go ahead with Shellhaven, we expect it to be funded through a mixture of debt, existing cash flows and property sales,? Murphy says. Another banker adds that with the group's container shipping division ? P&O Nedlloyd under heavy pressure ? the group may look to project financing to fund parts of Shellhaven to keep the expenditure off-balance sheet and in order to maintain its shareholder dividend.
Emerging markets the ports to call
According to Martin O'Neil, senior vice president corporate finance at Philippines-based International Container Terminal Services Inc (ICTSI), part of the problem for lenders in Europe is that the major operators themselves have reached a point where project finance has become a less attractive option. ?Quite aside from the issue that as far as new capacity is concerned, it's not entirely clear that western Europe needs it, although there is an odd situation in the UK, where a lack of capacity is forecast, there's a secondary issue for project financing in Europe now, and that's to do with the number of major facilities which are owned by such big corporations. From a capital finance perspective it's pretty easy for Hutchison Whampoa, PSA Corp and P&O to access capital through methods such as public debt. If you can get 20-year bonds at something like 70 basis points over the relevant sovereign spread, do you
really need a project finance facility?? he says.
Indeed, Hong Kong-based Hutchison set up its Hutchison Ports UK subsidiary to do precisely that, issuing a 20-year sterling bond that has financed expansions of its facilities at Felixstowe, Thamesport and Harwich. In all likelihood, it is expected follow a similar strategy if it builds Bathside Bay. ?Over the longer term public debt is cheaper and has a less restrictive covenants. On the other hand there is certain flexibility that comes with project finance, you may be able to keep it off the corporate balance sheet, and that can be useful if you've got other things you want to do as a corporation.? It also works if the operator does not own 100% of a new operation, and P&O has exploited several deals to finance construction of joint-venture operations in emerging markets such as Russia and Turkey.
And ICTSI's senior vice president for Europe, Middle East and Africa, Thomas Falknor, signalled that it may ?use a mixture of equity funding and project finance', if its goes ahead a deal currently being discussed to acquire and develop Baltic Container Terminal in the Polish port of Gdynia. The Filipino company has entered into exclusive negotiations with the port authority there as the preferred bidder ? beating AP Moller Terminals and CSX World Terminals. O'Neil qualifies the position: ?I am feeling quite comfortable that whether it's senior debt, mezzanine finance or straight equity it's not going to be difficult to fund this project. Despite the fact that over the past four or five years there's generally less money available in the emerging markets environment, with bank lending, non-bank lending and foreign loans all down, the markets have also decided that Poland is a good place to be. The sovereign risk perception is good, the zloty bank market is quite liquid, there's capital available.?
Falknor says ICTSI has little intention of even looking at possible projects in the developed world: ?The prices are much higher, the margins are much lower. Normally things such as labour costs are very high. In fact in many cases the fixed costs overwhelm your ability to make a decent margin. Basically the port business is one of the simplistic around in terms of supply and demand, but finding the right deal is hard.?
And last month, US operator CSX World Terminals showed that there is appetite for project finance deals, albeit also outside the developed world, after it secured a $195 million loan for a new container terminal at Punta Caucedo in the Dominican Republic. The loan was syndicated by Scotiabank, with Deutsche Investitions and Entwickungsgesellschaft and the IFC participating, and guaranteed by the French export credit agency Coface. The remaining $105 million of the project's costs are to be funded by equity from CSX Domincana and the Caucedo Development Corporation. Project financiers will have to continue to look outside Europe for deals in the port sector.
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