The $245 million bond financing for Ports America’s acquisition of the concession for the Seagirt was a much more sober process than the bank debt-fuelled ports acquisitions of the leveraged infra­structure finance boom. The tax-exempt bond issue, the first for a funding of a concession pay­ment, had to accommodate the terms of a boom-era financ­ing. It also had to work around the port’s existing set of commercial relationships.

The bond issue, through the Maryland Economic Development Corporation, for Ports America Chesapeake, closed during the first spell of good conditions for capi­tal markets issuers in 2010. Since then, there have been no other bond deals for private ports concessionaires, and part of the strength of the bond issue is the exist­ing presence of the sponsor at the port. But the deal highlights a way for other port operators to raise cost-effective finan­c­ing, and for grantors to share in the benefits.

The tax-exempt bond issue, for which Goldman Sachs was lead underwriter and Citi and BMO were senior managers, split into two series. A $167 million series A of transportation facilities improvement bonds and an $82 million series B of terminal project bonds. The series B bonds are a familiar instrument, because private operators have long been able to use tax-exempt debt to fund upgrades to docks and wharves. The series A bonds are more unusual, because they essentially fund a concession payment by Ports America to the Maryland Port Administration.

The series A bonds are structured in such a way that the private concession operator is responsible for their repayment, but never touches the proceeds. The issuer takes the proceeds of the series A bonds and transfers them to the Maryland Trans­portation Authority (MdTA), which accepts them in exchange for transferring the terminal to the Maryland Port Administration, which in turn is the grantor of a 50-year concession to Ports American Chesapeake. The MdTA spends the series A proceeds on transportation projects elsewhere in the state.

For series B, the issuer lends the proceeds on to the project company, which uses them to make predefined improvements to the terminal, mostly a new fourth berth capable of handing 50-foot draft post-Panamax vessels. The concession agreement includes a stipulation that the work must be complete by the time the Panama Canal expansion is complete in 2014, though the berth’s fixed-price $53 million turnkey construction contract with McLean Contracting has a completion date of January 2012.

The bond structure was on offer to, and the new berth was required of, all bidders on the concession. But comparing bids would be difficult, because Ports America, a Highstar Capital portfolio company, was already operating the terminal for the state, and had been since the terminal was built, when it was part of P&O Ports. NYK with Alinda, the other shortlisted bidder, did not submit a final bid in any case.

Ports America’s home advantage provided one big kink in structuring the financing, because the company operating the ter­mi­nal, Ports America Baltimore was a guarantor of the finan­cing that Highstar used to buy Ports America. The guarantor’s con­tracts with shippers could not be transferred to the new special purpose vehicle, and bondholders would have to wait for these to be renewed to take advantage of their cashflows.

The project company and the guarantor will remain inter­twined until all shippers have decided not to extend their con­tracts with the guarantor. During this period, the project com­pany will service cargoes on behalf of the guarantor, and costs will be allocated between the two according to a formula. The one should not be consolidated into the bankruptcy of another.

The fixed-rate bonds were issued with serial maturities between 2020 and 2035, with the 2020 bonds carrying a coupon of 5.125% (and priced to yield 5.25%), the 2025 bonds a coupon of 5.375% (and yielding 5.5%) and the 2035 bonds with a coupon of 5.75% (for a yield of 5.875%). The debt, which begins amortising in 2016, was six times oversubscribed. Both the series A and the series B bonds rank pari passu.

As part of the concession, Ports America is transferring all of the container operations at the next-door Dundalk terminal to Seagirt, and handing back some of the Dundalk site to the port authority, and the authority cannot build a competing site until Seagirt his 80% of its design capacity. The grantor also benefits from a share of excess revenues for volumes of over 500,000 TEU per year.

Using a bond issue meant that the sponsor had to be extremely conservative in its re­li­ance on future increases cargo volumes. The operator believes it can grow volumes from 400,000 TEU per year to 600,000 through better marketing efforts. Even with zero growth in volumes, the debt service coverage ratio would still be above 1x.

In addition to hoping for a sharp recovery in volumes from the recent recession, the new owner also hopes to use central purchasing facilities to cut costs, though it will have little ability to cut labour costs, which are covered by a collective bargaining agreement that covers most Atlantic port operators. It will also hope to catch most of the discretionary post-Panamax vessels visiting the East Coast, and has not traditionally handled much Asia traffic. Still, two shippers, Evergreen and MSC, between them account for half the port’s volumes.

PPP partisans keep hoping that cash-strapped US governments will offer up choice assets to private operators, and local politicians keep denying them substantial opportunities. In part this reflects the difficulty that he private sector has in demonstrating it can borrow at lower costs than existing public infrastructure issuers. Seagirt shows that with some creativity, it is possible to monetise assets in a way that satisfies the public sector, and gives the private sector a chance to prove its claim that it can be a more efficient operator.

Ports America Chesapeake
Status: Closed 7 January 2010
Size: $334 million
Location: Baltimore, Maryland
Description: Concession for Seagirt container terminal
Grantor: Maryland Port Administration
Issuer: Medco
Sponsor: Highstar Capital Fund III, LP
Equity: $75 million
Debt: $245 million
Lead underwriter and adviser: Goldman Sachs
Senior managers: Citigroup, BMO
Bond counsel: Miles & Stockbridge
Sponsor legal: Cleary Gottlieb
Legal counsel to underwriters: Orrick
MDOT counsel: McKennon Shelton & Henn
MPA advisers: PFM, Laurene B Mahon (financial), K&L Gates (legal), AECOM (technical) Martin Associates (market)
EPC contractor: McLean Contracting