SAN FRANCISCO — In what participants say is a groundbreaking deal, the Port of Oakland has agreed to a 50-year concession for five of its container-ship berths, with an option for two more.

Officials of the port and the concession winner, Ports America Outer Harbor Terminal LLC, valued the transaction at $700 million over 50 years, though only $60 million will be paid up front.

Port officials say their main goal in entering into the public-private partnership is to transfer infrastructure financing risks and responsibilities to the private sector.

“It allows the investment risk to be spread over a long period of time and sets the foundation for generating business revenue, jobs, and environmental benefits consistent with port policies,” the port’s executive director, Omar Benjamin, said in a statement.

Traditionally, the port has subleased its 20 deepwater container berths to operators for 10- to 15-year periods. It has issued bonds for seaport infrastructure directly, using the lease payments to support the debt service.

Under the 50-year concession, which commences on Jan. 1, 2010, the concessionaire, a joint venture of Ports America Group and Terminal Investment Ltd., has agreed to finance infrastructure improvements as well as pay a minimum $19.5 million annual rent.

The concession agreement sets a precedent for other ports to follow, according to John Hastings, head of U.S. infrastructure at RBC Capital Markets, the port’s financial adviser on the public-private partnership deal.

“By incorporating best practices from both traditional port leases and the global P3 market, this transaction illustrates how bold leadership and innovative structuring can lead to substantial benefits for both the public and private sector,” he said in a statement. “The overwhelming success of this landmark bidding process gives ports across the U.S. a new range of options when structuring future terminal agreements.”

Siebert Brandford Shank & Co. and Backstrom McCarley Berry & Co. were co-financial advisers. O’Melveny & Myers LLP was legal counsel to the port.

The $60 million up-front payment will be used to defease outstanding bonds.

“The port identified all tax-exempt bonds that had funded projects on the berths proposed to be subject to the concession,” spokeswoman Marilyn Sandifur said in an e-mail Wednesday.

“The Port of Oakland expects to sign the long-term concession agreement in mid-October 2009, and defease the debt in mid-January 2010,” she said. “We will be in full compliance with our tax covenants.”

The affected bond issues account for about $48.5 million in principal. With interest payable from the defeasance escrow, the total amount is about $55 million, Sandifur said.

The port will also save about $3 million a year in debt service, she added.

Port officials also say the agreement commits the concessionaires to make capital improvements to increase capacity at the berths while reducing the environmental impact of the operations.

“Very quickly after they start managing the operations at that terminal, they plan to invest $150 million additionally to help upgrade the terminal,” Sandifur said.

Those commitments include ship-to-shore power equipment that will allow ships to turn their diesel engines off while bearthed, and the use of electric stacking cranes instead of diesel-powered equipment.

The agreement also gives the concessionaire an option to acquire two adjoining container berths when current agreements expire starting in 2013.

Port officials say the concession reflects a long-term strategic shift, and follows a procurement process that began nine months earlier. But last week’s announcement comes at a time that the port’s two main business enterprises are under pressure.

In addition to operating the seaport, the Port of Oakland also owns and operates Oakland International Airport. Container traffic at the port has been impacted by the recession, while traffic at the airport has taken a disproportionately large hit in a tough aviation environment.

Fitch Ratings last week downgraded the port’s revenue bonds, dropping $948 million of senior consolidated revenue bonds to A-plus from AA-minus, and $499 million of intermediate-lien revenue bonds to A from A-plus. Fitch assigns a negative outlook.

“The downgrade reflects the combination of weakening operating trends and a growing debt service burden that was based on a higher level of activity on the aviation and maritime fronts that, to date, has not yielded the returns expected by the port,” according to the Fitch rating report.

During calendar 2008, container traffic at the port was off 6%, and aviation traffic at the airport dropped 22%, Fitch reported.

During the year, two major airlines chose to cease service into Oakland, and the airport lost three other carriers to bankruptcy.

Last year’s decline in sea container traffic became worse in the final months of the year, the ratings agency added.

“Fitch notes that the expected agreement with Ports America would represent a small increase over the previous minimum annual guarantee and a small reduction in the port’s expense base,” its report said.

Sandifur said the port will be unable to refinance its outstanding long-term debt that is subject to the alternative minimum tax into non-AMT debt under the terms of the recent federal stimulus bill.

“Our long-term AMT debt was issued prior to the cutoff dates in the stimulus package,” she said. She said the port believes it will be able to convert about $50 million of tax-exempt commercial paper currently subject to the AMT into AMT-exempt paper.

In a research report released in February, Standard & Poor’s analysts Robert Hannay and Kurt Forsgren said that cargo demand is softening in the current economic environment.

“Depending on the duration and severity of this recession, we believe traffic levels are likely to fall in 2009 and could fall further during the next several years,” they wrote.

At the same time, the analysts said, there is a strong demand for capital projects, citing a recent survey from the American Association of Port Authorities listing more than 200 projects worth more than $8 billion that ports would undertake in the next two years if they had funding.

Standard & Poor’s rates the port’s senior-lien bonds A-plus. Moody’s Investors Service rates the port’s senior revenue bonds A1. 

 

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