The Virginia Port Authority is scheduled to come to market on Wednesday with $251.78 million of revenue bonds, with most of the proceeds going towards an upfront rent payment.
"It is unusual for an issuer to finance upfront rent, but issuers have done it," said John Mousseau, vice-chairman and CIO of Cumberland Advisors. "For long-dated projects like ports, it probably helps getting better lease deals, thus it becomes a capital expense, not an operating expense."
The Port Facilities Revenue Bonds Series 2025 will land with an A1 rating from Moody's and an A from S&P Global Ratings. Both agencies assign stable outlooks. The bonds aren't subject to alternative minimum tax.
"I think the deal will get a great reception from the market," said Mousseau. The "A" rating should afford some extra yield in a AAA state where it's hard to find incremental yield away from healthcare."
The proceeds will be used to finance and refinance all or a portion of the authority's upfront rent payments to the Virginia International Gateway, the private owner entity of the terminal in Portsmouth, across the Elizabeth River from Norfolk.
VIG is owned by Universities Superannuation Scheme Ltd., a pension fund based in the United Kingdom, and Public Sector Pension Investments, one of the largest pension investment managers in Canada.
The port authority is a political subdivision of the Commonwealth of Virginia that administers the existing public marine terminals. It also owns Norfolk International Terminals, Newport News Marine Terminal, Virginia Inland Port and the Portsmouth Marine Terminal.
It operates the Richmond Marine Terminal on the James River under a 30-year lease.
VPA facilities are operated by its subsidiary, the Virginia International Terminals, which transfers net revenues to the authority monthly.
Differing from landlord-style ports, VPA serves as a single operator to align cargo demand with terminal resources across multiple facilities.
Landlord ports typically own the infrastructure of the facility but lease out the operations. Operating ports own the infrastructure and handle the operations internally.
The VIG terminal opened in 2007 as a 231-acre greenfield project built from scratch.
It was built out further under a 2016 agreement with the private consortium, which provided the capital funding, according to the online investor presentation about the deal.
Advanced technology such as artificial intelligence at VIG could lower costs as the port sector is buffeted by President Trump's tariff taxes.
"The port system employs a growing AI-type technology in its operations with a lot of remote operations which can be done on a more calibrated scale than manual workers," said Mousseau. "This is probably a good hedge against any inflation from tariffs."
The bond deal is part of a long game after which the port authority can ultimately own VIG.
According to the investor presentation, "on July 8 the authority drew approximately $471 million under a credit agreement with the Bank of America and applied the funds to legally defease the outstanding 2016 obligations and partially satisfy the upfront rent payment."
The authority is issuing Series 2025 bonds to finance or refinance a portion of the costs of the authority's $335 million upfront rent payment to VIG.
The original 49-year lease lasts until Dec. 31, 2065. It is now amended to include an option for VPA to buy the VIG terminal for a fixed price of $950 million at lease-end with no adjustment for inflation.
Payment of debt service on the 2025 bonds will be subordinate to payment of senior obligation lease payments to VIG.
The new arrangement "provides the authority greater operational control and flexibility with respect to the VIG terminal and the option to purchase the VIG Terminal," it said in the investor presentation.
In addition to the advance rent payment the proceeds will also be used to fund certain debt service reserve accounts or other reserves and pay all or a portion of the expenses incurred with the issuance of the series 2025 bonds.
VPA is completing a dredging project that will allow it to serve massive ships, accommodating 55-foot drafts.
According to VPA, the authority has the highest compound annual growth rate of comparatively sized East Coast ports including New York/New Jersey and Miami.
S&P Global Ratings sees low risk and high upside regardless of the unfolding tariff situation. "The rating reflects our opinion of the port's very strong enterprise risk profile and strong financial risk profile," the rating agency said.
"The enterprise risk profile incorporates the port's market position and importance to the national and regional economy, as reflected in its positive operational performance. Consistently strong debt service coverage, along with manageable debt needs and solid liquidity, support our financial risk profile assessment," they added.
"VPA continues to benefit from robust US cargo demand, operating efficiency gains, recent capacity expansions, its semi-automated operations and substantial rail service," Moody's said. "The credit profile also reflects VPA's stable market share and good scale as the 3rd largest container port in the US East Coast market."
B of A Securities and Raymond James are the lead managers of the deal with J.P. Morgan Securities, Loop Capital Markets, and Siebert Williams Shank as co-managers.
The municipal advisor is PFM with McGuire Woods as the bond counsel.
