Houston’s Port of Call: Refunding

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DALLAS — The Port of Houston Authority of Harris County will take advantage of its highly rated credit tomorrow by offering $327 million of refunding bonds, a deal that comes amid major expansion plans for one of the nation’s busiest cargo and petro-chemical facilities.

The negotiated sale is led by Merrill Lynch & Co. with co-managers Jeffries & Co., Samuel A. Ramirez & Co., RBC Capital Markets and Siebert Brandford Shank & Co. First Southwest Co. is financial adviser, and Andrews Kurth is bond counsel.

The deal will include $40.5 million of Series A, $52.1 million Series B and $234.6 million of Series C fixed-rate general obligation bonds, with series B and C not subject to the alternative minimum tax. Series A will be subject to the AMT. The Series C bonds are issued both as capital appreciation bonds and tender-option bonds. The size of Series C will be affected by the number of bondholders who tender their bonds for a premium.

“If you can get 40% of the bonds to be tendered, that’s a very successful tender,” said Edwin Harrison, chief financial officer for Harris County. “In a best-case scenario, all $234 million would be refunded.”

With the backing of the tax base of Harris County, Texas’ largest county, the bonds carry ratings of AAA from Standard & Poor’s and AA-plus from Fitch Ratings.

Because of the size and strength of its taxing district, the Port of Houston enjoys greater economic stability than some port facilities, such as the Port of Corpus Christi, which rely primarily on operations for their revenue.

Because of Houston’s status as the world’s oil hub, both the port and the city of Houston have been buffered from the most severe effects of the recent recession.

“The stable outlook reflects our expectation for the county’s tax base and tax collection stability,” Standard & Poor’s credit analyst James Breeding noted in his report. “We believe the authority has maintained strong financial operations and high liquidity levels as well that, while not needed for debt service, allow the port to remain self-sufficient.”

Fitch analysts said while cargo volumes were down nearly 14% in 2009, the port’s financial performance remains strong despite declining operating revenue.

“Management reports that freight volume has begun to show signs of a rebound and growth is anticipated for 2010, with new authority-owned docking facilities expected to open in mid-2010,” Fitch analysts reported.

The Port Authority reported a 22% increase in containerized exports in November compared to the same month in 2008, and a 4% drop in outbound goods year-to-date through November.

Exports of oil refinery products helped sustain the port’s export figures throughout the year, officials said. Houston is also a major import hub for steel, which took a dramatic downturn throughout 2009.

Through November, inbound steel tonnage fell 57% from 2008’s levels, and the drop for the first 11 months of 2009 was 87%. Port officials expect another 7.5% decrease in steel imports this year.

The authority expects to issue new-money debt this year to continue the $1.4 billion expansion of its Bayport facility, a long-term project over the next 15 years designed to capture an increasing volume of cargo expected to flow through an expanded Panama Canal. U.S. ports near the Canal Zone expect to benefit from a surge in shipping traffic when the $5.25 billion expansion of the Panama Canal is completed.

More than $10 billion of construction projects were already on the books at U.S. ports before Congress passed the economic stimulus bill last year.

The Canal Zone’s third set of locks, designed to accommodate the world’s largest cargo vessels, are expected to open in 2015, giving China’s container ships easier access to U.S. ports in the Gulf of Mexico.

“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 year.

“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.”

While the first phase of Houston’s Bayport project is operational, the major development is still to come.

“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. “That’s why we want to be ready when the third set of locks opens.”

The authority uses its long-term debt to take out commercial paper, currently supported by a $253.7 million revolving credit agreement with Bank of America that expires on Oct. 3. The port still has about $237 million of GO debt authority approved by voters in 2007.

The economic stimulus package signed by President Obama last year included $4.6 billion for U.S. Corps of Engineers dredging and $150 million for port security and some of those funds went to the Port of Houston.

In its bid for stimulus money, the American Association of Port Authorities identified $8.3 billion of construction projects that could use the funds.

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 in 2008 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 was estimated at more than $1 billion.

The Port of Houston Authority operates all public facilities of the port and maintains the 50-mile ship channel that connects it to the Gulf of Mexico. It ranks first among all U.S. ports in foreign tonnage and second behind New Orleans in total tonnage. It has only $547 million in outstanding debt, all of it backed by Harris County’s tax pledge. However, the port levies taxes for bond debt only if operations fall short of debt service.

“We believe the authority has ­maintained strong financial operations and high ­liquidity levels that, while not needed for debt service, allow the port to remain ­self-­sufficient,” said Standard & Poor’s ­Breeding.

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Transportation industry Texas
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