A $60 million upfront payment by Ports America and TIL gives the Northern California port limited recourse following their departure from Oakland Harbor Terminal, according to a research note by Fitch Ratings.
Fitch Ratings says it thinks the decision by Outer Harbor Terminal LLC to close its container terminal in the Port of Oakland and file for bankruptcy protection will be “manageable.”
“Although Fitch views these developments negatively, preliminary financial data from the port suggests the effects ought to be operationally and financially manageable,” the credit rating agency wrote in a research note.
Fitch added it will “review additional legal and budgetary information as it becomes available, likely in the spring of 2016 and will consider any financial repercussions to the port as a result of OHT’s bankruptcy. Based on these findings, Fitch may accelerate review of the port’s credit rating if such information is deemed to materially weaken the port’s credit profile.”
The agency notes that Outer Harbor Terminal (OHT), a joint venture between Ports America and Mediterranean Shipping Company subsidiary Terminal Investment Ltd., “indicated the rationale for their withdrawal is strategic, allowing a re-allocation of resources to its operations at the ports of Los Angeles, Long Beach, and Tacoma. The company’s decision is consistent with carrier trends towards aggregating cargo onto larger vessels which then call at fewer gateway ports, seeking to reduce sizeable capital costs.”
The company “did not cite the port’s recent congestion challenges or acute ILWU labor unrest seen in early 2015 as part of its rationale for leaving,” said Fitch.
OHT is one of Oakland’s largest terminal operators, “accounting for $37.9 million of fiscal 2015 port revenues, or 32 percent of the port’s fiscal 2015 minimum guaranteed revenues from marine terminal rentals,” according to Fitch. “The company’s withdrawal from the port is notable, not only because of its size, but also because the company is just six years through a 50-year concession.”
Fitch said the provisions for OHT to terminate the concession agreement “were atypically weak, providing the port with a sizable upfront payment but affording quite limited recourse in the event OHT should terminate the agreement early.”
Port spokesman Mike Zampa said that OHT paid the port about $60 million up front to obtain the concession.
In contrast, Fitch said, “Other tenant leases at the port are shorter in duration (typically 10 to 15 years) and reportedly contain stronger termination provisions. Management views other tenants as unlikely to leave the port due to the positive competitive impact resulting from the withdrawal of OHT, while Fitch views other tenants’ reportedly stronger termination provisions as an additional layer of protection.”
Among the factors the agency cited as mitigating OHT’s exit:
• Just 15 percent of the port’s cargo is estimated to be discretionary. A large portion of cargo is made up of exports from California’s central valley. “As a result, the port anticipates the lion’s share of cargo will stay in Oakland, and should be able to be processed at the port’s four remaining terminals, with secondary positive effects on those terminals’ financial positions and port operations, which are not currently running at full capacity.”
• The seaport only provides about half the port’s revenues, with the rest coming from Oakland Airport and commercial real estate activity such as Jack London Square in downtown Oakland.
• The port is considering plans to re-purpose the vacant terminal – negotiating with TraPac to lease a portion and has said it may look at other uses.
Fitch said “the port estimates the first full-year financial impact at $10 million to $15 million, net of certain anticipated offsets such as cargo reallocations to other terminals, to improve annually thereafter as the port recovers over a five- to six-year estimated time horizon.”
“Based on the fiscal 2016 budget, a decline at the higher estimated range would reflect just 4.5% of total port revenues (inclusive of the port’s cumulative maritime, airport, and commercial real estate operations) and any potential expenditure reductions would help absorb the ultimate impact on the port’s net operating income and related financial metrics.
“The terms of OHT’s withdrawal, including the ramifications of the bankruptcy, are still unknown, and it remains to be seen whether the port may be able to negotiate or is entitled to a termination fee,” it added.
Fitch said lease payments are supported by a $6.7 million letter of credit backed by Citibank, “though it is not clear, under OHT’s legal circumstances, what financial support the LOC ultimately will provide, if any.”
OHT ceased making lease payments as of Feb. 1, according to the credit rating agency.
Fitch: Loss of Port of Oakland container terminal tenant will be “manageable”
