All quiet on the lending front
Fitch's downgrading of Cleveland-Cuyahoga revenue bond rating does not bode well for the financial health of the industry
There are few signs that liquidity is returning to the world of port finance, as Mike King discovers
Even though the credit crunch was already being felt in April 2008, port assets remained highly attractive investments for operators, infrastructure funds and bankers if the number of bidders and the size of the prices agreed when terminal investments opportunities came to market was any guide.
The reasoning of investors was simple. Forecasts for world economic growth were bullish so, given that international cargo movements have tended to increases at multiples of gross domestic product, demand for port services looked robust in the long-term.
In many parts of the world it was also evident that the supply of suitable facilities - particularly those with access to funding for modern equipment and management - was scarce. On the one hand this meant large amounts of capital was needed to build a modern terminal so potential competitors faced major obstacles to entry. On the other, shippers, lines and other port users were increasingly concerned about their access to facilities and were willing to make long-term volume and financial commitments, helping investors offset their own expenditure.
Ports also have a number of other factors in their favour. They tend to generate stable and growing cash flows which can be used as a hedge against inflation because as cargo values rise, tariffs can be increased. And, because they are quite often an essential economic asset, ports also have maintenance and capital investment requirements that are fairly predictable.
Fast forward to April 2009 and many of the investment 'rocks' on which investors were basing their decisions a year ago have now crumbled.
World trade forecasts are being downsized by the week as sectors and countries that seemed likely to escape the economic crisis a few months ago are dragged into the downward spiral. Gone are the guarantees that volumes and income from terminal operations will continue to rise in the long-term.
And, of course, there are few signs that liquidity is returning to the world of finance. Paul Slater, chairman of First International Corp which advises terminals how to raise debt and equity or sell companies, says sourcing capital to invest in ports and finding buyers has become very difficult "as the banking markets remain frozen along with the other debt capital markets".
The result has seen port operators delay or cancel newbuilding projects, infrastructure funds shy away from the sector, and private banks which had previously embraced the ports sector become extremely reluctant to countenance new deals.
"Obviously credit availability is extremely tight but some of the fundamental assumptions about port investments have come under fire," says Manju Chandrasekhar, vice president of port consultancy Halcrow. "There are not many deals coming to market even in the US. Although some projects are still going ahead, there's just less appetite for maritime assets."
Greenfield developments have been hit hardest by the deterioration in credit availability and the economic outlook, but many planned brownfield investments also now have question marks hanging over them and ports in general are scaling back their capital programmes.
Some investors which overpaid when the market was at its peak are now looking to sell assets, potentially creating openings for well-financed companies looking to purchase distressed assets.
So where can ports and terminals turn in search of capital? Port Strategy contacted a range of consultants as well as commercial and development banks and the options would appear to be limited.
One mainstream bank which is still marketing finance for shipping and has plenty of history in port finance was surprisingly reluctant to talk about its port financing options. "We're re-evaluating our policy of ports and terminals, we can't comment further at this time," says a spokeswoman.
Another option for those seeking to raise finance is regional and international development banks, although many of those contacted by Port Strategy were reluctant to elaborate on what funding and conditions are currently available to ports and port investors.
Another option for port authorities and private companies in many parts of the world could be to tap into the massive finance packages announced by governments as they seek to pull their economies out of recession.
In China, a substantial chunk of the government's $585bn war-chest for economic recovery will be spent on infrastructure, but it is unclear how operators or port authorities can apply for capital.
The UK, bizarrely, seems to be going down an entirely different path, with government hammering port tenants with back-dated rates charges which threaten to put many out of business.
In the US it is unclear exactly how much funding will be available for maritime infrastructure in President Barack Obama's mammoth $787bn package. Halcrow's Mr Chandrasekhar does not expect significant capital to find its way to US ports, however. "If you look at the specifics in the US stimulus package, and the size of the package in relation to GDP and the amount for infrastructure, proportionally for ports it's unlikely to be more than a drop in the ocean. Most of the money will go to capital markets," he says.
Efforts by US port authorities to tap into private capital markets in bond auctions are also increasingly likely to fail as banks have stopped supporting the system and many US port authorities have now had their bond ratings downgraded by analysts.
Fitch Ratings recently downgraded the implied revenue bond rating on the Cleveland-Cuyahoga County Port Authority to 'BBB-' from 'BBB'. "The Rating Outlook is revised to Negative from Stable," says a statement from Fitch. "The downgrade to 'BBB-' reflects the financial strain the authority faces beginning in 2009 due to lower forecasted revenues and higher expenses, primarily attributed to the current economic downturn and as a result of additions to personnel which have increased salary and benefit costs as well as other operating expenses."
Even the Port of New York & New Jersey, traditionally able to raise finance with little trouble due its diverse portfolio, had to withdraw a bond auction last December because of a lack of bidders.
The Authority admits it faces "downward pressure on its long-term capital financial capacity given the impact of the economic slowdown on revenues it receives from its tunnels, bridges, airports, and seaports, as well as decreases in financial income".
Echoing port operators around the world, New York & New Jersey is now reassessing its long-term capital programme in a way "that reflects the new economic and fiscal realities" as it looks to manage the economic crisis.
"New York/New Jersey has traditionally been seen as about as rock solid as you can get," says Mr Chandrasekhar. "It's an extremely fearful, panicky, distressed market. The rules of engagement of the last 20 years have gone. It's very strange."
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