US ports are exposed to shipping companies via terminal operators, which are often structured as joint ventures between carriers and do not have remoteness from their parent entities, Fitch Ratings said.
Namely, Hanjin Shipping‘s and Outer Harbor Terminal’s (OHT) bankruptcies this year have raised questions about the legal separation of JV terminal operators that are often lease counterparties for US ports.
For example, Pier T at the Port of Long Beach is leased for 25-years to Total Terminal International (TTI), a joint venture between Hanjin (54%) and Terminal Investment Limited (TIL), the terminal operating arm for Mediterranean Shipping Company (MSC, 46%). Fitch said that the port viewed the JV 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, Fitch Ratings said that Hanjin’s ability to post its share in the TTI JV as collateral to secure funding from Korean Air, one of its 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,” Fitch Ratings said.
Furthermore, Port of Oakland’s second largest terminal operator, OHT, a joint venture between Ports America and MSC subsidiary TIL, ceased operations and filed for bankruptcy in early 2016, the sixth year of its 50-year concession.
The rating agency said that termination provisions of the concession agreement were “weak” since the concession provided the port with a sizable upfront payment but afforded limited recourse in case the agreement is terminated 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. According to Fitch Ratings, 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, Fitch said, adding that careful consideration of costs and benefits of such concessions and scrutiny of termination provisions are needed in order for ports to be protected when considering acceptance of these agreements.