Transshipment’s Caribbean Ports are Weathering an Economic Storm
Slower growth in global trade and increasing political and economic uncertainty have ratcheted up risk for the Caribbean’s transshipment port operators following the expansion of the Panama Canal. Jennifer P. Roig from InfraLatinAmerica asks industry experts which operations are likely to appeal to lenders
Now that the Panama Canal has been expanded to accommodate much larger ships, ports in the region are in pressing need of major overhauls to remain competitive. But getting financing on attractive terms is becoming more difficult as lenders fret that Investing in upgrades will be essential, says Julián Palacio, chief executive officer at Latinports, an association representing Latin American ports and terminals. “But developers are dealing with a lot of uncertainty,” Palacio adds.growth in global trade might flatten. Meanwhile potential protectionism in the wake of Donald Trump’s election as US president is another threat to global trade volumes and the bankability of upgrades to transshipment ports.
“With a strong competition happening between different transshipment hubs, nothing prevents a big shipping line from changing a route to use another facility. In the Caribbean, geographic location is not the main advantage to consider, but efficiency,” notes Romain Papassian, partner at US-based financial services firm Astris.
Investing in upgrades will be essential, says Julián Palacio, chief executive officer at Latinports, an association representing Latin American ports and terminals. “But developers are dealing with a lot of uncertainty,” Palacio adds.
Global trade has remained stubbornly flat in recent years, as indicated in a special report prepared by Industry Exchange for the Latin America Ports Forum 2016. In Latin America, foreign trade flows increased between 2004 and 2011, riding the ports usually cater to two or three big shippers and if one goes bankrupt, it can have a great impact on the port’s profits,” Peña says.commodity super cycle which led to a boom in imports and exports. However, a contraction started in 2012, the report indicates.
“If foreign trade increases, then everybody will be fine. But in the other scenario, which is a strong possibility, only the most competitive ports will have the advantage,” says Miguel Peña, global head of Infrastructure & Asset Finance at BBVA.
In addition, the bankruptcy of Korean shipping line Hanjin, one of the largest in the sector, sent shivers down the spines of many investors who are now wondering whether other big players could follow. Transshipment ports, as a central link of a logistics chain, depend on the shipping lines. “An investor has to really understand a port’s competitive advantage, which is a combination of geography, operational costs and efficiency, and relationships with the larger shipping lines. The latter is very important, because ports usually cater to two or three big shippers and if one goes bankrupt, it can have a great impact on the port’s profits,” Peña says.
Financiers often match the currency of the loan with the denomination of revenues to minimize the FX risk, hence most port concessions have been financed in US dollars, says Julián Botero, vice president of corporate and government at Colombian lender Bancolombia. As in other infrastructure projects, bankers look at the sponsors’ technical and economic strengths, as well as the underlying feasibility of the project. Macroeconomic trends concerning global trade, the potential of the port to mobilize cargo, and its proximity to main markets are also important elements in the mix.
Due to the high uncertainty inherent to these projects, deals are structured with a 60:40 debt to-equity ratio, rather than a 70:30 ratio more common in other infrastructure transactions. To add cushion to the financing, structures mitigate risks through different mechanisms, including mitigation tools include sponsorsand shareholders’ guarantees, reserve accounts, and guarantees from the EPC regarding the completion of construction and equipment.
“We also evaluate the business plan. Many times the projections are forecasting a faster growth than can actually be achieved. It is useful to know about the shipping lines’ strategies as well,” says Peña.
Meanwhile, ports in the Caribbean Basin tend to operate as monopolies or quasi monopolies, as only a limited number of locations can offer the necessary physical features for building these facilities, points out Catherine McCarthy, partner at Clifford Chance and part of the firm’s Americas Energy & Infrastructure Group.
And the expansion of the Panama Canal has impacted transshipment hubs in another way. More big ships are arriving in the Caribbean, but many are not navigating at full capacity. Given the close connection between shipping lines and transshipment “Ports are not magnets. Just because a developer has built a new port, it does not guarantee the arrival of ships with cargo” ,Palacio adds. ports, overcapacity is a threat to both. Having half-full ships on inter-oceanic routes increases the costs for shipping lines, while having fewer containers to transfer erodes ports’ core earnings. Volume of cargo transferred, measured in Twenty-foot equivalent units, is the main source of revenues for operators, rather than the fees received from larger vessels or use of storage services.
Palacio underscores that slow growth in global trade adds potential risks to the development of new ports, pointing out that some transshipment ports have even seen a decrease in the level of cargo transferred. “Ports are not magnets. Just because a developer has built a new port, it does not guarantee the arrival of ships with cargo,” he says. “A decrease in the global volume of cargo moved can be a threat even to port operators if they can’t use the facility at full capacity,” Palacio adds.
Barings Investments has invested in small and medium-sized ports that serve to a specific export or import business, but would have difficulty in supporting a transshipment port. “Ports are projects that offer high returns,” says Emerson de Pieri, head at Barings Investments Latin America. “However, transshipment ports are very big projects with a lot of risks involved. Nobody wants to take that risk because the economy could deteriorate. Rather than seeing a plan of future profits, we would prefer to have a guarantee or a letter of commitment from a bank supporting the project.
” Although it is lower down the agenda, climate change has slowly entered the conversation as investors and developers try to examine the potential impacts of climate change.
Experts from the Intergovernmental Panel on Climate Change (IPCC) have anticipated a global sea level rise, which will likely inundate low-lying coastal regions. Increasingly severe storms will likely mean more frequent floods and worsening coastal erosion.
“Multilaterals think about climate change as a risk because it is in their nature. We see it as a longer term risk because we have a longer term perspective. Multilaterals care about the asset over the next 15 or 20 years, and we consider that the asset will need the sector will have winners and losers in the future; ports that will be able to garner business from shipping lines and others that will not, says Peña. to sustain more frequent and stronger storms over that time span,” says Martelli from the IIC.
“Financing ports in general is challenging, but transshipment ports are particularly difficult,” points out Astris’ Papassian. “These are not infrastructure projects as traditionally understood, but more of a crossroad between logistics and infrastructure. It requires financiers to have an in-depth market intelligence to get comfortable with a project.
“These projects require a long-term assessment, beyond how variable the trade demand might be from year to year, or how big is the next float of ships coming to the market. This means that the sector will have winners and losers in the future; ports that will be able to garner business from shipping lines and others that will not. Developers are taking a gamble, assuming that the market will grow and shipping lines will use their port as part of a route,” says Peña.
Shipping companies are still adjusting to the new trade map. They are trying routes to establish the fastest and most profitable ones. Just as November started, Singapore-based APL, among the world’s largest container shipping liners, announced a new express shipment service connecting the transshipment hubs of Kingston in Jamaica and Cartagena in Colombia. APL is a subsidiary of the Singaporean shipping company NOL Group, is now part of French CGM CMA Group. “The new Colombia Bridge Express aims to enable reliable cargo movements between Asia, the Caribbean and the United States East Coast,” the company said.
An eventual lift of the US trade embargo would add the Cuban port of Mariel to be another transshipment port in the Caribbean, further influencing the routes of shipping lines. El Mariel, with natural deep waters and a convenient location, is already operated by PSA. Investments to expand and improve the facilities have continued, after Brazilian builder Odebrecht completed a major overhaul in 2014.
Another element altering the shipping lines map is the consolidation of activities in fewer hubs, which will likely weaken the position of smaller transshipment ports, Martelli notes. But the most efficient port operators will remain relevant for shippers.
Miguel Peña from BBVA also points out that ports having a dual role, as transshipment hubs and serving the import-export business, might be in a better position to face the volatility. “This [importexport business] provides stability to a port’s business,” Peña says. “Volumes can vary, increasing or decreasing, depending on the fluctuations of the local economy, but it won’t disappear.”