port finance review

The ports and terminals sector continues to be beset in a myriad of ways by the impact of the last year’s financial turmoil, even as signs of economic recovery get stronger as 2009 draws to a close.

The slowdown in world trade was a factor that most obviously hurt the ports sector, particularly those who made investments at the peak of terminal valuations on the basis that trade would continue to see double-digit growth each year. But the ongoing tightness of credit instruments continues to impact new investments, privatisation efforts and attempts by financially-stricken marine companies to sell terminal assets to improve liquidity.

Paul Slater, chairman of First International Corp, does not expect any of these woes to disappear until the world economy has fully rebounded. He predicts the impact of the credit crisis and the fundamental changes in trade patterns that resulted will reverberate in the port sector for years to come with container terminal operators likely to be most affected and Asia-based businesses increasingly seeking non-Western markets for goods where possible.

As a result, the value of terminal assets has in many cases plummeted. “Simply put, the recovery has a long way to go to reach the levels of 2007 let alone the growth expectations inherent in the prices paid for terminals in 2006 and 2007,” he says.

“Most expansion plans have been shelved, deferred or cancelled, particularly those designed to accommodate the new jumbo ships, most of which are in, or going into, lay-up.”

Manju Chandrasekhar, vice president for economics and business solutions at consultant Halcrow, cites RREEF’s acquisition of Maher Terminals as the single-most spectacular example of “implosion” in the port finance market.

“Various sources within the industry cite that the tabled bid was in the low 30s, in terms of EV/EBITDA multiples,” he explains. “Prior to reaching financial close apparently one of the terminal’s key lines pulled out, thereby reducing the projected volumes and resultant revenue, which forced the effective EV/EBITDA multiple into the mid 30s range.”

This was subsequently followed by the financial crisis and contraction in volumes which reportedly rendered the transaction to be valued at an EV/EBITDA multiple closer to, if not greater than, 40. “Ultimately, it is understood that Deutsche Bank took the asset out of the fund and placed it on its balance sheet, in order to be able to guarantee debt-service coverage,” says Mr Chandrasekhar. “It is understood that, partly in the aftermath hereof, Deutsche ultimately had to shut down the fund.”

The financial markets have eased somewhat in recent months, with credit spreads re-emerging from a year-long hibernation, but financing for port development remains tight and far more expensive than pre-2008. This means that either multiples are considerably lower or projected return horizons are more distant – or both – largely due to the implied reduction in the ability to exercise leverage.

“There is still much uncertainty in the markets on all fronts – finance, consumer spending, credit, employment and cargo volumes,” says Mr Chandrasekhar.

He believes the global financial crisis has had a more profound impact on container port development during 2009 than it has on other infrastructure sectors. The glut in shipping capacity and the fact that terminal operators, shipping lines and infrastructure funds all had bullish forward-looking plans set the scene: “They were relying on continued growth in container volumes at annual percentages that were at least in the high single-digit range, if not low double-digit range. Combined these and it is easy to understand how the bottom would have quickly fallen out of the market,” he says.

The dramatic drop in container volumes and reduced forecasts for growth during the recovery cycle and in the long-term will keep a lid on terminal valuations for the foreseeable future.

“It is hard to make an argument that would support a return to valuation levels that were seen in 2006 through 2008, not to mention the fact that, by some accounts, those valuations were considered expensive to begin with,” says Mr Chandrasekhar.

The impact upon privatisation projects has also been severe. Fewer deals have found their way to market in developed economies. Of those that have, many have either suffered from a lack of competition in terms of the number of bidders, or valuations have been way short of expectations.

In France, for example, government efforts to transfer port authority terminal personnel and plant to private sector operators early next year are now being stymied by the inability of terminal owners to finance the transfers.

A recent report by Kuwait Financial Centre ‘Markaz’ suggested that billions of dollars pledged to port investment in the Gulf Cooperation Council (GCC) countries in the Middle East face delay or cancellation, in large part because of uncertainty about oil revenues but also due to the failure to attract operators. The report estimates that some $1.68bn of investment in ports has now been shelved, although this is a relatively minor chunk of the total commitment of over $38bn.

One company which has been vocal about its plan to buy port assets is The Port Fund. Here, managers hope to raise $300m in 2010 to invest in terminals and claim to have met a number of container lines keen to sell terminal assets in a bid to raise cash.

Principal Ghislain Lorthois states a reasonable benchmark for purchases would be around 8-12 times EBITDA, a long way short of the multiples agreed in deals completed between 2005 and 2008.

Mr Slater believes that some global port operators might look to buy terminals cheaply to help to average down their risk, but he does not expect a headlong dash of investors to look at ports any time soon even if container lines are looking to offload assets at reduced prices. “Private equity will not be active in this area until the credit markets ease up and even then there will be no rush to invest,” he says.