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Gulf Ports Rise as Economic Tide Falls

DALLAS - Despite a strong global economic ebb tide and hurricane damage, Gulf Coast ports are planning to use federal stimulus funds and continue issuing debt to build for what they hope will be a more promising future.

With a $5.25 billion expansion of the Panama Canal underway, U.S. ports near the Canal Zone expect to benefit from a rebound in shipping traffic once the recession gives way to economic recovery. More than $10 billion of construction projects were already on the books at U.S. ports before Congress passed the economic stimulus bill last month.

"Additional debt will likely be necessary for many planned projects, particularly once the currently turbulent credit markets stabilize," Standard & Poor's analyst Robert Hanney wrote in a report on the sector last month. "However, should the U.S. economic recession and global economic slowdown become more severe, last beyond 2009, or both, credit fundamentals may deteriorate due to falling demand for cargo transport,"

To handle the hoped for increases in shipments expected from China and other Pacific Rim countries, the Port of Houston Authority is continuing the $1.4 billion development of its Bayport project, a cargo and cruise ship facility that is expected to take 15 to 20 years to complete.

Last month, authority commissioners approved $34 million for electric cranes for Bayport.

"With the largest port that is closest to the canal, we see ourselves as a direct beneficiary of its expansion," said Lisa Whitlock, spokeswoman for the Port of Houston Authority. "That's why we want to be ready when the third set of locks opens."

Given the deep national recession that came to Texas in the last quarter of 2008, the port authority will adjust the construction as conditions warrant, according to Whitlock.

"We have to be responsible and recognize the economic realities," she said. "We will be diligent in keeping track of trends."

With the existing Barbour's Cut terminal facing gridlock in 2007, the authority opened the first phase of Bayport amid a strong economy. The project is financed with general obligation debt backed by taxpayers in surrounding Harris County.

A $266 million refunding issue in June 2008 earned the port an upgrade from Standard & Poor's to AAA from AA-plus. Moody's Investors Service rated the debt Aa1 while Fitch Ratings does not supply an underlying rating.

The Houston port still has all of its $250 million of GO bond capacity authorized by voters in 2007. The port expects to issue $125 million this year and another $125 million next year, said Edwin Harrison, director of financial services for Harris County. The bonds will take out commercial paper used for a variety of projects.

Houston, as well as other ports, expects to benefit from the suspension of the alternative minimum tax for municipal bonds issued for private commercial development this year and next. AMT bonds typically trade about 100 basis points higher in yield than bonds not subject to the AMT, Harrison noted.

The increased capacity at Houston is expected to coincide with the opening of Panama's third set of locks, designed to handle larger cargo vessels by 2015. Panama is financing the expansion with debt backed by toll revenues that do not require a government pledge.

The Port of Houston, which has ranked first in the U.S. in total foreign tonnage for 12 straight years, is second in total tonnage behind New Orleans.

Houston enjoyed its ninth year of record revenues despite a decline in business during the last two months of 2008, Whitlock said.

The Houston port, which was built 50 miles inland and opened 14 years after the 1900 hurricane that devastated Galveston, suffered less damage from Hurricane Ike last year than Galveston's port, which has never regained its pre-1900 status as Texas' busiest. Ike's damage to navigation projects in the Texas Gulf Coast region in September was estimated at more than $1 billion.

Considered one the most devastating hurricanes to make landfall in the United States, Ike struck Galveston on Sept. 13.

Last month, Standard & Poor's lowered its outlook on Galveston's wharve and terminal revenue bonds to negative, based on the hurricane's damage, the port's relatively small size, and the fact that 75% of its debt is variable rate. The rating was left at BBB-plus.

"The negative outlook is based on our view that should debt service coverage decrease significantly from historic levels and liquidity remain at the lower level, the credit fundamentals of the port would no longer be consistent with the BBB-plus rating level and the SPUR would likely be lowered," said Standard & Poor's credit analyst Robert Hannay. "However, the port's recovery after Hurricane Ike has shown good progress, with many port tenants back in operation. Should financial and operational metrics return to pre-storm levels, the rating may be affirmed and the outlook returned to stable."

Meanwhile, the Port of New Orleans continues its own recovery from 2005's Hurricane Katrina and minor damage from Hurricane Gustav last year. The port, whose revenue bonds are rated BBB-plus by Standard & Poor's, saw its traffic growing to 71% of pre-Katrina levels in 2007 but remains susceptible to economic upheaval, particularly disruptions in steel imports, analysts said.

"We expect the port to return to a pre-Katrina level of cargo operations over the medium term, while at the same time maintaining its strong cash position," Standard & Poor's credit analyst Laura Macdonald wrote in a report last year.

Before the economy entered its steep decline, accompanied by collapsing oil prices in the second half of 2008, the Port of New Orleans' board of commissioners last March presented a $1 billion plan for future development, including new container, cargo, and cruise ship facilities. The plan for development through the year 2020 pointed out that more than $10 billion of projects were already on the books for competing ports.

Standard & Poor's noted the increasing need for infrastructure projects, despite projections for a decline in cargo traffic this year.

"Although this may mean increased borrowing at the same time that traffic demand is softening, projects that public U.S. ports have undertaken, in our view, have tended not to be overly speculative," Hanney wrote. "Also, bond covenants and ports' generally prudent financial management practices work to limit the leveraging of revenue streams."

Cargo volumes at major US container ports declined for 18 months through January, with last year's figures the weakest year since 2004, according to the monthly Port Tracker survey by IHS Global Insight for the National Retail Federation.

Southern California port volume fell 23% in December year on year and 16.4% from the previous month, according to data from the Port of Los Angeles and the Port of Long Beach, ports which handle 40% of all U.S. retail imports.

For the first six months of 2009, cargo volume is expected to fall nearly 12% from last year's volume, according to the Port Tracker survey.

The economic stimulus is expected to keep port expansions on track. The stimulus includes $4.6 billion for U.S. Corps of Engineers dredging and $150 million for port security.

Before President Obama signed the stimulus plan, the American Association of Port Authorities identified $8.3 billion of construction projects that could use the funds.

Separately, the Texas ports of Beaumont and Port Arthur east of Houston will receive $4 million in federal funds to assist with recovery from 2008's hurricanes and flooding. The funds will equip the Port of Orange to handle petrochemical products under an innovative cargo transportation system; the project on the Port of Beaumont's Orange County site will provide intermodal railroad connections.

At the nation's southernmost Port of Brownsville, the Texas Transportation Commission approved stimulus funds to build a toll road from the port to U.S. 77.

To the north, the Port of Corpus Christi plans to use $195 million in stimulus funds to complete five projects, including $70 million for extending the La Quinta Ship Channel about 1,000 feet and another $70 million for a dock at the container terminal. The remaining $55 million would fund a rail-expansion project, a facility for wind turbines, and the second phase of a trade corridor.

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