case 1: container port - oecd.org - oecd elements type of project container port distinctive...
TRANSCRIPT
JAMES POLAN VICE PRESIDENT
OVERSEAS PRIVATE INVESTMENT CORPORATION
Case 1: Container Port
Overseas 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
Overseas Private Investment Corporation
Project Instruction
Description of financing
• 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.
Overseas Private Investment Corporation
Background
• 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 of
alternatives.
• There are four existing terminals at the historical port. This project
financing is for a fifth, larger container berth at the port.
Overseas Private Investment Corporation
Project Summary
• 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 post-
Panamax cranes. Furthermore, it can stack containers six-high (versus
four-high at some of the other berths).
Overseas Private Investment Corporation
• Various large container carriers, one an industry giant, set up
Container Port Co. with local groups and a project finance structure .
• 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 balance
provided in the local currency (both on a project and working capital
basis).
Project Summary (cont.)
Overseas Private Investment Corporation
• 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 its long-
established agency, the Port Authority.
• 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.
Project Summary (cont.)
Overseas Private Investment Corporation
Contract - Concession
• 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 then
lenders have a step-in right.
• 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.
Overseas Private Investment Corporation
• The concession also requires a US$3.8 million construction and
performance guarantee, which is provided by an international bank. An
FP and AP annual payment guarantee is also posted by the bank.
• 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.
Contract – Concession (cont.)
Overseas Private Investment Corporation
• 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
Overseas Private Investment Corporation
• 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.
Contract – Construction Contract
Overseas Private Investment Corporation
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
• 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.
Project Finance Structure – Container Port
Overseas Private Investment Corporation
Besides the equity commitment, sponsors also provide:
• 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
Project Finance Structure – Container Port (cont.)
• 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;
f) no default/potential default; and
g) DSR established/funded.
Overseas Private Investment Corporation
Project Finance Structure – Container Port (cont.)
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
Evolution of Structure
• 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$13.5 million for the four Container Port co. cranes.
• Local OPEX decreases (per container) over time due to productivity improvements.
Overseas Private Investment Corporation
Credit Analysis – Market Forecasts
• Local OPEX is inflated at local CPI (5 per cent per annum) with fuel escalated at US CPI (3.5 per cent per annum).
• Local labor costs escalate at 10 per cent per annum initially, declining to 5 per cent from 2011 on.
• A fixed local currency: US dollar rate is assumed.
• A five-year tax holiday is assumed with 30 per cent corporate income taxes thereafter.
Overseas Private Investment Corporation
Credit Analysis – Market Forecasts (cont.)
• The base-case model shows robust results at an average DSCR of 3.1
with a minimum of 2.44.
• Two break-even cases were run to test the TEU levels needed to pay
interest and principal.
Overseas Private Investment Corporation
Financial Model
Container Port Company 10- Year Financial Projections. (US$ 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)
0.37 0.78 1.26 1.58 1.97 2.27 2.55 2.79 2.99 3.18 3.18
Operating cost risk
• 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.
Overseas Private Investment Corporation
Risk Analysis – Operating risk
Operating management risk
• 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
Risk Analysis – Operating risk (cont.)
• 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 to
stevedores 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.
• The government imposes tariff penalties on above-quota usage of the
historical port.
.
Overseas Private Investment Corporation
Risk Analysis – Political risk
• 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
Risk Analysis – Infrastructure risk
• 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.
.
Overseas Private Investment Corporation
Risk Analysis – Market risk
• 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
Risk Analysis – Completion risk (cont.)
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.
The terminal design was undertaken by an international firm that has long experience with the main sponsor on previous port projects.
Overseas Private Investment Corporation
Risk Analysis (cont.)
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
Risk Analysis (cont.)
• 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 to rolling cover of 65 per cent of the US dollar debt. Local currency banking lines were also brought into place.
• 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 local currency.
• 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 million TEU per annum; (3) improved readiness at the other terminals, even though they can only handle the smaller Panamax-sized vessels for now.
Overseas Private Investment Corporation
Problems encountered
• 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 banks taking on elements of market/ throughput risk.
• The operator and its partners are primed to take full advantage of the evolution of the post-Panamax container world more attuned to hub-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
Lessons learned
• The robust cash flows, strong break-even position, sound operator, and positive market position make the project capable of riding out further local government or economic trade storms.
Overseas Private Investment Corporation
Lessons learned (cont.)