Case 1: Container Port - OECD.org - OECD Elements Type of project Container port Distinctive...

JAMES POLAN VICE PRESIDENT

OVERSEAS PRIVATE INVESTMENT CORPORATION

Case 1: Container Port

Overseas Private Investment Corporation

Basic Elements

Type of project

Container port

Distinctive features

Full market risk project financing

First build-own-operate-transfer (BOOT) port concession in the

country

No political risk cover

Limited recourse, non-local sponsor support for completion

Dual-currency facility


Project Instruction

Description of financing

• US$ 24.5 million plus Local currency facility of 200 million construction

loan

• Converting to 10-year back-ended structured principal repayment

project finance loan

• Subject to shortening by mandatory prepayments from excess cash

flow.


Background

• The local government had become increasingly concerned about the

port access to the capital city.

• The historical port adjacent to the city centre lies on a river 28

kilometers from the river mouth.

• Traffic congestion in the capital road system coupled with vessel-size

restrictions from silting in the river forced an examination of

alternatives.

• There are four existing terminals at the historical port. This project

financing is for a fifth, larger container berth at the port.


Project Summary

• Establishment of a two-berth container terminal on country's east

coast.

• The capital, a river city, has reached its port saturation (regarding

containers and water depth).

• The container industry is moving quickly to large vessels with 18-19

rows of containers across the deck, labeled 'post-Panamax’.

• This terminal will be the only one in the port equipped with post-

Panamax cranes. Furthermore, it can stack containers six-high (versus

four-high at some of the other berths).


• Various large container carriers, one an industry giant, set up

Container Port Co. with local groups and a project finance structure .

• The sponsors were able to achieve a classic project financing with

limited recourse support post-completion, essentially backstopping

minimum container throughput.

• Total funding required was US$68.5 million provided as to US$41.4

million of term debt and US$2.6 million as a working capital line.

Eventually this was trimmed to US$24.5 million with the balance

provided in the local currency (both on a project and working capital

basis).

Project Summary (cont.)


• FX facilities were added in a natural response to the devaluation of

the local currency.

• Overall, the risk profile has been soundly balanced. The project has

the active support of the Local government through its long-

established agency, the Port Authority.

• The port development is a key component of industrialization in the

coastal zone nearby and also to decongest container traffic in the

over-congested capital city.

Project Summary (cont.)


Contract - Concession

• The new project port terminal entitles the owner to a 30-year BOOT

concession expiring in 2026, with an option to extend this date by five

years. If the project company defaults under the concession then

lenders have a step-in right.

• At the time of transfer a payment of the written-down book value of

moveable assets will be made by the Port Authority.

• The concession payment structure is an escalating fixed payment (FP)

and additional payment (AP).

• In the event that the government increases/reduces the port tariffs

scheduled in the concession, then APs will be reduced/increased

accordingly.


• The concession also requires a US$3.8 million construction and

performance guarantee, which is provided by an international bank. An

FP and AP annual payment guarantee is also posted by the bank.

• An oversight committee will monitor construction progress.

• The project company is obliged to give the Port Authority on-line

access to some port traffic and statistical information.

• The Port Authority has adopted a pragmatic regulatory attitude and the

four existing operators have not encountered problems in recent years.

Contract – Concession (cont.)


• The management services agreement (MSA) runs for 10 years from

port startup.

• The main project sponsor has the right to appoint the CEO and chief

engineer, and is paid a US CPI-indexed fixed, yet declining, annual fee

plus a variable fee above minimum throughput volumes.

• A subsidiary of the main project sponsor is also the project manager

and is entitled to .65 per cent of the project company’s profits.

• Force majeure persisting beyond six months is one cause for MSA

termination.

Contract – Management Service Agreement


• A fixed-in-price, fixed-in-time contract has been structured for the

quay works, carrying 10 per cent liquidated damages (LDs) backed by

a 10 per cent performance/maintenance guarantee.

• Standard default conditions apply with the addition of war or

permanent/fatal force majeure.

• A one-year defects liability period applies.

Contract – Construction Contract


Project Finance Structure The deal’s structure is shown in here:

Local

Government

Port

Authority

MIS

BOOT

Concession

for 30 years

Lawyers

Investor 1 Investor 2

Sponsors

1. Group 1 34.5%

2. Group 2 30.5%

3. Group 3 20.5%

4. Group 4 14.5%

Insurers

Arrangers/

Lead

Funders

Other

Banks

Design

Consultants Project

Manager Contractor

Equipment

Vendors

Container Port

Company

Guarantees

LDs Performance

Guarantee

MSA

contract

Delay/

insurance

Security

• Amount: US$24 5 million; Local currency 200 million.

• Term: 11 years with one year grace.

• Repayment: structured back-ended principal repayments commencing at 6 per cent in Year 1 rising to 15 per cent in Year 10.

• Interest withholding: at lender's option, 10 per cent absorbed annually for a fee; otherwise grossed up.

Project Finance Structure – Container Port


Besides the equity commitment, sponsors also provide:

• Overrun facility: US$15 million (61 % of civil construction costs) during

construction and startup.

• Debt service reserve: six months held in a local bank account, funded

up-front.

• Equity lock-up: DSCR < 1.2 trigger.

• Cash deficiency: US$8 million (approximately two years of debt service).

• DSCR top-up: US$500,000 per annum to get to a DSCR of 1.2.


Project Finance Structure – Container Port (cont.)

• Mandatory prepayment: 50 per cent of excess cash flow (before

dividends) in Years 1-2; reducing to 25 per cent thereafter.

• Financial completion: all of the following test components must have

been met:

a) technical completion;

b) consents in place;

c) Debt:Equity not more than 63:37;

d) DSCR more than 1.75 for one six-monthly period or more than 1.5 for

two consecutive six months;

e) insurances are satisfactory;

f) no default/potential default; and

g) DSR established/funded.


Project Finance Structure – Container Port (cont.)

The original financing incorporated an annuity principal repayment with a

deferral option.

This was replaced with a more back-ended principal repayment structure

in return for an extension of half of the CAPEX overrun facility into an

extra standby debt service reserve (of about two years of debt service).

Security consists of:

a) a fixed and floating charge over Container Port Co. assets; and

b) a first mortgage over Container Port Co. shares.


Evolution of Structure

• Tariffs are assumed to escalate 6 per cent every three years.

• Incentive/discounts on stevedorage, wharfage and export yard storage

of 5 per cent initially, tailing away to zero by 2001.

• Crane overhauls occur every 10 years at around US$13.5 million for the four Container Port co. cranes.

• Local OPEX decreases (per container) over time due to productivity improvements.


Credit Analysis – Market Forecasts

• Local OPEX is inflated at local CPI (5 per cent per annum) with fuel escalated at US CPI (3.5 per cent per annum).

• Local labor costs escalate at 10 per cent per annum initially, declining to 5 per cent from 2011 on.

• A fixed local currency: US dollar rate is assumed.

• A five-year tax holiday is assumed with 30 per cent corporate income taxes thereafter.


Credit Analysis – Market Forecasts (cont.)

• The base-case model shows robust results at an average DSCR of 3.1

with a minimum of 2.44.

• Two break-even cases were run to test the TEU levels needed to pay

interest and principal.


Financial Model

Container Port Company 10- Year Financial Projections. (US$ Million)

Total/Average

Project Year 1 2 3 4 5 6 7 8 9 10

Operating cash flow 17.3 20.6 25.4 28.0 27.5 28.6 26.5 24.8 25.0 25.0 224

Capital expenditure 0.0 (2.6) (1.4) (9.9) (4.5) (1.5) 0.0 0.0 0.0 0.0 -19.8

Working capital (2.7) (0.5) (0.7) (0.4) 0.0 (0.2) 0.1 0.1 0.0 0.0 -4.2

Front-end /commitment fees 0.0 0.0 0.0

PF loan interest payments

(3.9) (3.6) (3.4) (3.1) (2.7) (2.4) (1.9) (1.4) (0.9) (0.3) -23.7

Corporate income taxation 0.0 0.0 0.0 0.0 0.0 (6.3) (5.7) (5.4) (5.6) (5.8) -28.8

PF principal repayment (2.1) (2.5) (2.5) (2.8) (2.8) (3.5) (4.2) (4.2) (5.3) (5.3) -35.0

Total Uses (8.7) (9.2) (7.8) (16.2) (10.0) (13.8) (11.8) (11.0) (11.8) (11.4) -100.2

Net PF cash flow after tax

8.6 11.4 17.5 11.8 17.5 14.8 14.8 13.9 13.2 13.6 123.5

- Cumulative 8.6 20.0 37.5 49.4 66.9 81.6 96.4 110.3 123.5 137.1

Cover ratios

- Interest 3.21 4.12 6.84 5.67 8.28 8.41 10.09 13.00 20.21 59.97 7.70

- Principal 5.11 5.64 8.16 5.23 7.25 5.22 4.51 4.31 3.51 3.59 4.53

- Debt service 2.44 2.87 4.02 3.02 4.16 3.52 3.41 3.46 3.14 3.45 3.10

Global PV (Available cash flows)

0.37 0.78 1.26 1.58 1.97 2.27 2.55 2.79 2.99 3.18 3.18

Operating cost risk

• A dedicated berth offers significant operating efficiencies.

• By converting to a dedicated terminal, the Container Port Co. could

increase throughput even further.

Operating technology risk

Besides efficient logistics and tracking software, the main technology

risk is the push towards post-Panamax container ships.


Risk Analysis – Operating risk

Operating management risk

• Main sponsor was initially a manager of one of the historical port

river berths.

• Main sponsor also has been the operator of one of the inland

container depots in the local country.

• Outside of the local country, main sponsor operates or has

operated 4 major world ports.

• The main sponsor container tracking and port maintenance

software will be implemented for Container Port Co.


Risk Analysis – Operating risk (cont.)

• The Port Authority sets port tariffs.

• Over 50 years only one tariff change was effected to accommodate container

charges. The government approval process is laborious.

• Unofficial charges are the norm at the historical port, plus payments to

stevedores and customs officials of up to 25 per cent of the scheduled tariff

are demanded just to lift cargoes off ships and even more is required for

faster service.

• The government imposes tariff penalties on above-quota usage of the

historical port.

.


Risk Analysis – Political risk

• There are four existing 300-metre-long berths at the port, each able to

handle a maximum of 300,000 TEU per annum.

• These operate under 12-year licenses from the Port Authority, which

provides all of the infrastructure and cranes.

• The Port Authority has agreed to extend these licenses by 15 years from

their present expiry date of 2004 in return for the operators installing an

additional crane or upgrading their current equipment.

• Once the new port developments commence, the present single rail track

will need to be made into double tracks.

• An independent consultant's report was commissioned by the banks on

the road and rail links from Container Port Co. to the capital.

.


Risk Analysis – Infrastructure risk

• Market forecasts all point to significant annual growth rates for the

country’s ports.

• The historical port together with the other river ports will only be

capable of handling 1.4 million TEU, so that the balance will be

handled by Container Port Co.

.


Risk Analysis – Market risk

• An independent consultant for the banks checked the construction contracts noting some problems with pile strength. Piling is 3 per cent of the project costs. This report was provided to the sponsors.

• The project manager, a subsidiary of the main sponsor, is experienced in port project construction management.

.


Risk Analysis – Completion risk (cont.)

FX risk

The project was assessed at a fixed Local: US dollar rate.

International container shipping prices and fuel costs are US dollar denominated; thus some element of a natural hedge exists.

Engineering risk

Building a port generally has little serious engineering or design risk.

The main risk is geotechnical from poor coastal soils.

The terminal design was undertaken by an international firm that has long experience with the main sponsor on previous port projects.


Risk Analysis (cont.)

Syndication risk

Local banks were the natural target for syndicating this deal. The first strategy was to syndicate two-thirds of the deal. This was changed to 50 per cent when the lead bank also provided the FX hedge.

Interest risk

Interest set in Sibor was swapped to a fixed rate for the first five years. Final maturity is dynamic given the mandatory prepayment mechanism.

Legal risk

An English project finance solicitor was engaged by the banks. The country has a reasonable history of project finance and local security laws are well tested. New York law was selected for all of the project documents.


Risk Analysis (cont.)

• The local government suffered a significant devaluation in the years following the project. At first, a major cross-currency swap was put into effect, settling to rolling cover of 65 per cent of the US dollar debt. Local currency banking lines were also brought into place.

• The sponsors had to absorb a significant loss on the initial contracts and a more programmatic hedging process has been put in place for two-thirds of the dollar exposure. The working capital facility is now entirely denominated in local currency.

• Acceptance of Container Port Co. by container ship operators was slower than even the bank's conservative assumptions and the DSCR support facility had to be called.

• The slow uptake in container traffic is generally attributed to (1) economic slowdown; (2) failure of Port Authority to fully reduce the historical port to 1 million TEU per annum; (3) improved readiness at the other terminals, even though they can only handle the smaller Panamax-sized vessels for now.


Problems encountered

• This well-structured project financing shows how readily any project finance deal becomes a 'living' arrangement that responds dynamically to changing conditions.

• The surplus of completion funding was neatly used to underpin FX hedging unforeseen when the deal was first underwritten. This was further adapted for a post-completion limited recourse credit support that still has the banks taking on elements of market/ throughput risk.

• The operator and its partners are primed to take full advantage of the evolution of the post-Panamax container world more attuned to hub-and-feeder arrangements. Container Port Co. is poised as one such hub, while the existing port has run out of capacity.


Lessons learned

• The robust cash flows, strong break-even position, sound operator, and positive market position make the project capable of riding out further local government or economic trade storms.


Lessons learned (cont.)

QUESTIONS?

End of Part 1


Case 1: Container Port - OECD.org - OECD Elements Type of project Container port Distinctive...

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