JAMES POLAN
VICE PRESIDENTOVERSEAS 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
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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
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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 ofalternatives.
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There are four existing terminals at the historical port. This project financing is for a fifth, larger container berth at the port.Project Summary
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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•
Various large container carriers, one an industry giant, set upContainer Port Co. with local groups and a project finance structure .
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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 balanceprovided in the local currency (both on a project and working capital basis).
Project Summary
(cont.)
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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 itslong-established agency, the Port Authority.
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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.Contract - Concession
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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 thenlenders have a step-in right.
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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 andperformance guarantee, which is provided by an international bank. An FP and AP annual payment guarantee is also posted by the bank.
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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.•
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
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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.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
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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.Besides the equity commitment, sponsors also provide:
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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.Overseas Private Investment Corporation
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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;
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.
Overseas Private Investment Corporation
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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$13.5 million for the four Container Port co. cranes.•
Local OPEX decreases (per container) over time due to productivity improvements.•
Local OPEX is inflated at local CPI (5 per cent per annum) with fuel escalated at US CPI (3.5 per cent per annum).•
Local labor costs escalate at 10 per cent per annum initially, declining to 5 per cent from 2011 on.•
A fixed local currency: US dollar rate is assumed.•
A five-year tax holiday is assumed with 30 per cent corporate income taxes thereafter.Overseas Private Investment Corporation
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The base-case model shows robust results at an average DSCR of 3.1 with a minimum of 2.44.•
Two break-even cases were run to test the TEU levels needed to pay interest and principal.Container Port Company 10- Year Financial Projections. (US$ 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)
Operating cost risk
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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.
Operating management risk
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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.Overseas Private Investment Corporation
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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 tostevedores 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.
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The government imposes tariff penalties on above-quota usage of the historical port.•
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..
Overseas Private Investment Corporation
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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..
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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..
Overseas Private Investment Corporation
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.
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.
Overseas Private Investment Corporation
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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 torolling cover of 65 per cent of the US dollar debt. Local currency banking lines were also brought into place.
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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 localcurrency.
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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•
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 bankstaking on elements of market/ throughput risk.
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The operator and its partners are primed to take full advantage of the evolution of the post-Panamax container world more attuned tohub-and-feeder arrangements. Container Port Co. is poised as one such hub, while the existing port has run out of capacity.
Overseas Private Investment Corporation
