Investors are torn between the high risk and high returns offered by ports. Felicity Landon reports
With cargo volumes under pressure around the world, investors are understandably cautious when it comes to funding the ports sector. But while port construction is a long way from the levels of its pre-crisis peak, all is certainly not lost.
London-based finance lawyer Chris Brown, a partner with Norton Rose Fulbright, says that while the market does seem to have slowed, with fewer greenfield projects, he believes there will probably be a lack of port capacity sooner rather than later in some regions of the world – and adds: “People generally take a long-term view as long as the economic case is good. Ships and logistics are becoming more sophisticated.”
He also points to the increased interest from shipping lines looking to get a stake – and some strategic control – in some of the terminals they are using.
“There were a lot of new port projects in the early 2000s. There was a massive consolidation in the container fleet and some container companies were looking to do their own thing in terms of ports, so they would have the benefits of better managing berthing and handling, and making up some of the money paid to port operators,” he says. “For example, MSC built port facilities, or dedicated terminals at existing ports.”
When the financial crisis came, and with it a significant reduction in shipping rates, a lot of investors pulled out of the ports market because their balance sheets were quite stressed, he says.
“What came next was a move to global alliances to try to smooth out some of the volatility in the market place – and also these partners went into projects together. And from the banks’ perspective, there is less of a risk if you have more companies looking to support and commit to a project.”
Traditionally, says Mr Brown, shipping lines were not willing to submit to long-term ‘offtake’ contracts – they were not willing to commit to calling a certain number of days a year, and so on. “But by forming alliances and making certain commitments, they were able to get into projects like Rotterdam World Gateway and that meant these were more fundable projects – because the grouping of shipping companies effectively gave support to the project’s future in terms of shipping volumes, so there was more certainty.”
Mr Brown says that is where he sees the market going – container fleets forming alliances and possibly entering into port projects, so they are better placed to manage berthing and handling and they can also get some of the returns from the port itself.
“Also, ships are getting bigger, so shipping lines want bespoke terminals.”
One problem, he says, is that if a port operator teams up with one set of users, to a certain extent that might distance the operator from the rest of the market or users. “However, I think it is part of the consolidation of the container fleet – first because volumes are down, and second because of serious volatility in terms of pricing.”
Any investment in a port, he points out, is a quite significant investment which takes a lot of time to amortise – a port project can be quite slow to develop volumes.
“There are constraints because of public sector financial controls and, at the same time, there has been considerably less bank debt around to finance private sector development. I think there will probably be a lack of port capacity in some regions of the world and it is proving quite difficult to raise capital at the moment because public sector balance sheets are constrained, while the private sector is experiencing a lot of volatility, causing banks concerns and leading to a reduction in long-term bank debt. Also, port projects are quite complicated in terms of demand forecasting.”
Tomas Vitsounis, project leader, Total Port Logistics, at NICTA, Australia’s ICT research centre of excellence, says that future capital outlay requirements and capabilities are progressively becoming more uncertain and this has a direct effect on port operators’ investment decisions.
“The magnitude of an investment in ports and port operations requires a lot of expenditure on forecasting,” he says. “The key issue for port management is to recognise the future flows of trade with their counterpart ports and the demand of customers for their port services. However, the customer is not directly the shipping company but rather the end client, the one that places the actual order for delivery or purchase.
“From that point onwards, the port has to adjust to the technological requirements of the available and suitable ships for the delivery of the order and the intermodal connection that will facilitate the transport of the product. It is within that complex environment that the port management has to form its investment decision – given, of course, that there are competitor ports that will be willing to do the same.”
Despite the greater caution, there is great interest in port infrastructure, according to Michael Pomerleau, partner at InduStreams and Port-Investor.com. “Many investors are ready to take on investments exceeding $500m and a good number are ready to go over $1bn,” he insists.
Berend Paasman, senior vice president, shipping, offshore and logistics, at DNB Bank, says that in the past two to three years there has been quite a lot of interest from the largest global port operators to try to win container terminal concessions – i.e. the big four operators (APM Terminals, DP World, PSA, Hutchison Ports), plus companies like ICTSI, TCB and TIL.
“Many of these new concessions have been in more ‘risky’ countries, in Africa or Asia, where fewer international banks are able or willing to finance.
“Often the larger global port operators that have corporate funding lines as well have used internal loans to finance these opportunities – especially if they own a terminal project 100%.
“On the other hand, in more mature emerging markets, more banks are able to and interested in finance. DNB itself has this year participated in port construction financings in, for instance, Peru and India. In some countries, it isn’t only international banks that are active, but local banks as well.”
And even capital market solutions are becoming available in emerging markets, says Mr Paasman. “For example, Mersin Port in Turkey (with PSA as a sponsor): this was an emerging market deal where PSA was able to refinance existing debt mainly through a bond issue.”
The factors that operators consider in looking at their return and risk for a port deal are, however, not necessarily the same considerations as for banks, he adds. “Banks have to make their own analysis on the positioning of the debt, as you can have a more risky port project but with a conservative debt structure, which can still be attractive for banks. On the other hand, you can have a solid port project, but with a lot of debt which then becomes a more risky deal for banks. DNB as an institution has followed a consistent strategy in port finance over the past ten years. The quality of, and relationship with, the sponsors behind a port project is a very important factor for us.
“In general, tenors in the bank market are now five to seven years but, under particular circumstances, deals are sometimes done with slightly longer tenors – for instance, if there is significant amortisation, or a high likelihood of earlier repayment.”