New-fashioned financing

For those, multilateral agencies such as the World Bank and Asian Development Bank are definite prospects for filling the gap. Another avenue to explore is listing units in a business trust, while some port owners are willing to attract new equity investors to underpin expansion.

The good news is that ports are accepted as a good investment asset class, and the entry of financial backers (active ones such as JP Morgan, and passive ones such as pension funds) make alternative sources of funding available.

The health of the port sector to investors was demonstrated with the initial public offering of the Russian infrastructure company Global Ports on the LSE. The company raised $534m by offering “Global Depositary Receipts” equivalent to more than 20% of its equity.

Further proof came in a report by London lawyer Holman Fenwick Willan which says private equity is returning to the global port investment market with Latin America, India and Africa being the hotspots for future infrastructure funding. It adds that merger and acquisition deals appear to be increasing.

Martin Pilsch, principal of Maryland-based Equip-Right, says a number of ports have developed projects that will add capacity significantly, even though present volumes may not support expansion.

“The long-term effort to bring new facilities on line mandates five-to-ten year master planning. Port bonds and terminal operator financing seems to continue for these long-term projects.

“I am finding, however, that after a period when the trend indicated some recovery, the industry has now begun to speak cautiously about continued growth in business levels. They are looking at a flat period or even worse, another downturn.”

Experts spoken to by Port Strategy concur that money is harder to get from traditional sources. European banks, even those not known to have much exposure to risky loans, have pulled in their horns.

An example is given by Larry Lam, chairman and managing director of Singapore-based Portek: “In a recent port project in Europe that we looked at, a particular bank insisted on some kind of club deal with another bank to co-finance the project, even for a loan size of only about €10m ($14.3m). This was for the purpose of sharing risks with another bank as a matter of policy, regardless of the absolute loan size.

“It made financing of the project cumbersome and unattractive because of increased processing fees, more documentation and upfront commitment fees.”

One trend is the need to have specific projects stack up under their own credentials, rather than relying on the strength of the “corporate” to attract funding.

Borrowing at the corporate scale has advantages, one of which is attaining economies of scale. The downside is forex risk and term mismatch with specific investments, which would subsequently be made at the operating level.

Even if the “corporate” is getting the funding, cash flows from operations must be available to the corporate to service the loans, so the strengths of specific projects remain crucial.

When it comes to funding mechanisms, there is a discernible difference between major equipment such as quay cranes, rubber-tyred gantry cranes or rail-mounted gantry cranes compared with smaller equipment. Portek’s Larry Lam says that for quay cranes and the like, the preference of port operators is to purchase outright and put these assets on the balance sheet.

“For smaller equipment such as reachstackers and forklifts, certain markets or countries may have preference for leasing for tax reasons, maintenance consideration or duration of asset utilisation.”

Equip-Right’s Martin Pilsch agrees large-ticket items such as ship-to-shore cranes, mobile harbour cranes and gantry cranes are usually financed and purchased outright. Yard tractors, container lift trucks and forklifts can be acquired via direct purchase or long- or short-term lease depending upon the project.

“At this moment … many terminal operators have adopted a conservative approach to their equipment, attempting to stretch out the life a bit longer, waiting for the upward trend to reappear and reach a point where they can justify some additional expenditure.”

But what of innovative financing options or sources not commonplace a few years ago? One answer for ports in emerging markets is to look at support from agencies with a regional development agenda.

Says Portek’s Larry Lam: “Multilateral agencies such as the World Bank, IFC [a member of the World Bank Group] and Asian Development Bank have stepped up their role, and begun to fill in the gap left by the private banking sector.

“Such funding is especially useful for developing countries and emerging markets … and can often provide more favourable interest rates and repayment terms.”

Portek executive director Ooi Boon Hoe adds: “One other method aside from the traditional bank lending and debt issuance is the possibility of listing units in a business trust. In theory, capital can be raised for expansion through the sale of new units in the trust.”

What then is the expert advice for ports facing major expenditure, in terms of obtaining finance on favourable terms?

The basic rule is to present a good but realistic business plan, showing the project is still able to pay back the loan even in the worst case scenario, says Portek’s Mr Lam.

“Unrealistic or overly-optimistic projections (particularly those that fail to predict the counter-action of competitors) will be easily spotted by the experts on the lender side, and will lose credibility.

“Using consultants to do feasibility and market studies is fine, but beware … it is always in their interest to see the project be realised rather than whether it is giving the necessary return.

“Go to lenders who have a special interest or knowledge in the port sector, or who have non-financial considerations such as IFC and ADB who are development-orientated.

“For strong and highly-viable projects, non-recourse project financing terms should be obtained such that the project can stand on its own, thereby ring-fencing the operating subsidiary and the parent company from the project risks.”