Fitch: US Ports Exposed to Shippers Via Terminal Operators

Hanjin Shipping's and Outer Harbor Terminal's (OHT) bankruptcies this year have raised questions about the legal separation of joint venture terminal operators that are often lease counterparties for US ports, Fitch Ratings says. These events highlight potential risks that must be balanced against the benefits of ports signing lease or concession agreements.

Global carrier Hanjin's bankruptcy has exposed the possibility that terminal operating companies, which are often structured as joint ventures (JVs) between shipping counterparties or private equity firms, do not always offer remoteness from their parent entities. For example, Pier T at the Port of Long Beach is leased for 25-years to Total Terminal International (TTI), which is a joint venture between Hanjin (54%) and Terminal Investment Limited (TIL), the terminal operating arm for Mediterranean Shipping Co. (MSC, 46%).

The port viewed TTI's joint venture structure as separate from Hanjin and initially expected it would not be directly exposed to the bankruptcy, with TTI continuing to make its lease payments. However, Hanjin's ability to post its share in the TTI JV as collateral to secure funding from Korean Air (one of Hanjin's largest shareholders) to allow processing of stranded cargo suggests that terminal JVs are not always remote from the financial situations of their owners.

While lease terms are often confidential, scrutiny of JV structures for lease and concession partners is warranted given ports' potential exposure to shipping counterparties, which are typically of lower credit quality than their port operator landlords in the US.

Port of Oakland's second largest terminal operator, OHT, a joint venture between Ports America and MSC subsidiary TIL, chose to cease operations and file for bankruptcy in early 2016 - the sixth year of its 50 year concession. Termination provisions of the concession agreement were atypically weak: the concession provided the port with a sizable upfront payment but afforded limited recourse in the event OHT should terminate the agreement early.

Ports America indicated that its withdrawal from Oakland was strategic, allowing a re-allocation of resources to its terminal operations at the ports of Los Angeles, Long Beach, and Tacoma. This is consistent with moves by carriers to reduce sizable capital costs, with shippers aggregating cargo onto larger vessels, which then call at fewer gateway ports.

As mergers between some of the world's largest shippers increase and alliances morph to include different carriers with varying bases of operation, ports may be exposed to similar strategic shifts. Careful consideration of the costs and benefits of such concessions, as well as scrutiny of termination provisions, can provide protection as ports consider taking on these agreements.

For more information, see "Fitch: Port of Oakland, CA's Loss of Second Largest Tenant Negative Yet Manageable", Feb. 3, 2016 on www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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