International Association of
Maritime Economists (IAME)
2010 Conference, Lisbon,
Portugal
The Financialization of the
Terminal and Port Industry:
Rediscovering Risk
Jean-Paul Rodrigue
Paper no. 2.09.02
Department of Global Studies & Geography, Hofstra
University, New York, USA
Theo Notteboom
ITMMA - University of Antwerp and Antwerp Maritime
Academy, Belgium
Athanasios Pallis
Department of Shipping, Trade & Transport
University of the Aegean, Chios, Greece
The Financialization of the Terminal and Port
Industry: Rediscovering Risk
1) Embeddedness, Spatial disconnection and
Financialization
2) Finance and Leverage Upside-Down
3) Rediscovering Risk
4) Re-embedding Finance and the Port Terminal
Industry
5) Conclusions: Rebalancing Trade and the
Balance Sheet
Finance and the Maritime Industry: An Embedded
History
■ An old relationship:
• Joint stock companies (17th century; VOC).
• Insurance industry (e.g. Lloyd 1871).
• Finance used to leverage the opportunities of international
transportation.
• Providing capital and mitigating risk when needed.
■ Local embeddedness:
• Financial district in view of the wharves.
■ Industrial revolution and globalization
• Better growth opportunities outside trade.
• Separated the financial from the industry and the geography
=> cf. literature on port-city relations, global city networks,
etc..
The Age of Discovery … of Risk: Dutch East India
Company, Trade Network, 17th Century
Historic Proximity of the
Port / Financial District
Port and Maritime Industry Finance: Who is
Leveraging Whom?
Investors
Financial
Markets
Brokers
Corporations
Money Markets
Commercial
Banks
Private
Investors
Capital Markets
Mortgage
Banks
Investments
Managers
Equity Markets
Merchant Banks
Private
Placement
Finance Houses
•Insurance Companies
•Pension Funds
•Banks
•Trust Funds
•Finance Houses
Leasing
Companies
Shipping
Companies
Port
Operators
Earnings
Value Propositions behind the Interest of Equity
Firms in Transport Terminals
Diversification
(Risk mitigation value)
Sectorial and geographical asset diversification.
Mitigate risks linked with a specific regional or
national market.
Asset
(Intrinsic value)
Source of income
(Operational value)
Terminals occupy premium
locations (waterfront).
Globalization made terminal
assets more valuable.
Traffic growth linked with
valuation.
Same amount of land generates
a higher income.
Terminals as fairly liquid assets.
Income (rent) linked with the
traffic volume.
Constant revenue stream with
limited, or predictable,
seasonality.
Traffic growth expectations
result in income growth
expectations.
Container Terminal Surface of the World's Major Port
Holdings, 2009
N = 405
Container Terminals of the World's Four Major Port
Holdings, 2009
The Financial Playground (1997-2008)
At least 246 terminals acquired via M&A
(some examples)
New Comers
(financial
institutions)
Goldman Sachs
Wall Street Bank
Deutsche Bank
Prudential
AIG
Borealis (Canadian pension fund)
Ontario Teachers Pension Fund Babcock & Brown Infrastructure
Macquarie Infrastructure
Mantauban SA
Sovereign Funds GIC (Singapore government co) Dubai Ports World
Players from
within the sector
(Stevedores &
Shipping
Companies)
CMA-CGM
Eurogate Holding
Eurokai
Hesse Natie
Hutchison Port Holdings
PSA Corp.
Maersk Line
Neptune Orient Lines
Nippon Yusen Kaisha
P&O
Reviewing Assumptions: The Impacts of
“Financialization”
Physical assets seen as financial assets.
Disconnection
Rent-seeking
strategies
From market
knowledge
Focus on shortterm results
Asset inflation
High amortization
Expectations of quick capital amortization.
Expectations about future growth and the
corresponding volumes.
From long-term
business cycles
From outcome of
actions
Lack of
accountability
From local/
regional dynamics
Lack of regional
embeddedness
Loss of
embeddedness
Assets perceived simply from their expected
level of return.
Lower
contestability
Perceived liquidity.
Capacity to quickly enter and exit the market.
Consolidation and Scale Increases: Major Port
Terminal Acquisitions since 2005
Date
Transaction
2005
DP World takes over CSX World
Terminals
Early 2006 PSA acquires a 20% stake in HPH
Mid 2006
DP World acquires P&O Ports
Mid 2006
Goldman Sachs Consortium acquires
ABP
End 2006 AIG acquires P&O Ports North America
Early 2007 Ontario Teachers’ Pension Fund
acquires OOIL Terminals
Mid 2007
RREEF acquires Maher Terminals
Price compared to
EBITDA
14 times
17 times
19 times
14.5 times
24 times
23.5 times
25 times
EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization
Additional Factors of “Recklessness” in pre-crisis
“bubble” (2002-2008)
■ Supply lagging behind demand
• Capacity shortages in terminals and ships increasing their
“market value”.
• Sense of “urgency” in terminal and shipping investments.
■ Emerging terminal management model
• Concessions agreements to maximize returns.
• Over-bidding related to availability of finance; OPM.
• “Right price’ replaced by “any price”.
■ Existing actors being “financialized”
• Equity related offerings on financial markets.
Shipping Equity and Equity-linked Offerings in
Public Markets (2000-2007)
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2000
2001
2002
2003
2004
2005
2006
2007
The Financial Playground:
Private Equity Funds and Ferries (1995-2004)
Operator
PEF Buyer
Year
1995
Price Paid
(€ million)
160
Equity share
(estimated)
Min Holding
Wightlink
Cinven
Condor Ferries
3i
1995
50
33%
Moby Lines
Efibanca/MPS
2000
5
4,3%
Wightlink
Royal Bank of Scotland
2001
270
35%
Red Funnel Ferries
JP Morgan
2001
105
Min Holding
Condor Ferries
ABN-AMRO
2002
225
Maj Holding
Isle of Man Steam Packet
Montagu Private Equity
2003
210
100%
Wightlink
Maquarie Bank
2004
350
Min Holding
Condor Ferries
Royal Bank of Scotland
2004
360
Maj Holding
Red Funnel Ferries
HBOS
2004
145
49%
Moby Lines
Equinox
2004
20
14%
Grandi Navi Veloce
Permira
2004
522
80%
Sources: Baird (2009); Cruise & Ferry Info: ShipPax, Halmstad, Sweden.
The Financial Playground:
Private Equity Funds and Ferries (2004-8)
Operator
PEF Buyer
Year
Price Paid
(€ million)
Equity share
(estimated)
Moby Lines
Clessidra
2005
50
30%
Isle of Man Steam Packet
Maquarie Bank
2005
315
100%
Grandi Navi Veloce
Investitori Associati
2006
700
87%
SNCM
Butler Capital Ptnrs
2006
35
38%
Red Funnel Ferries
Prudential
2007
300
Maj Holding
Scandlines
3i / Allianz
2007
1,560
-
Superfast Ferries
Marfin Investment
2007
500
90%
Blue Star Ferries
Marfin Investment
2007
500
85%
UN RoRo
Kohlberg Kravis
Roberts
Maquarie Bank
2007
910
100%
2008
390
Maj Holding
Condor Ferries
Total
Sources: Baird (2009); Cruise & Ferry Info: ShipPax, Halmstad, Sweden.
7,682
The Double Squeeze on Ports and Maritime Shipping
in the “Post-Bubble” Period
Overcapacity
New terminals coming
online
New ships coming
online (+ cancellations)
Contestability for
gateways
Contestability for
hubs
Rebalancing
Lower profitability
Less pressures on terminal resources
Less financial appeal
High
Re-Discovering Risk: Relations between Risk and
Embeddedness
Trust
Risk Level
FINANCE
Low
Information
SHIPPING
Low
Embeddedness Level
High
Risk Typology in Ports, Terminals and Shipping
Risk Category Type
Details
Technical
Internal
Construction and technology
Market
External
Gross domestic product, growth, inflation, market structures,
changes in supply chain management practices.
Internal
Business models (e.g. concentration/specialization risk),
traffic demand, elasticity, pricing and capacity strategies of
rivals and on alternative routes, energy cost risks
External
Interest rate, taxation currency, exchange rates, debt rating of
the country, payment risk (customer base).
Internal
Capital risk (including loans availability and interest rates,
revenues, payback period, grant financing)
External
Legal, Regulatory, Security, moral hazard
Financial
Political
Environmental External
Changes of environmental laws, unforeseen societal
sensitivities
Re-embedding Finance and the Port Terminal
Industry
1) Risk Allocation
Desire to allocate greater risks onto private sector in PPPs:
• Requires clear policy goals and stable regulation.
• Moral hazard risks will continue to be tested.
More demanding capital markets and less access to (cheap)
credit:
• Focus on performance to meet financial metrics.
• New projects more critically assessed.
Greater consideration of cost recovery of port infrastructure
investment:
• From the deal / financial structure to quality of the asset.
2) Reviewing False The assumption that larger players have more information than
Asymmetries
smaller players:
• The larger players appear to have lost the most.
Re-embedding Finance and the Port Terminal
Industry
3) Growth Story:
Time for realism
Abandoning the compound annual growth paradigm
• Port traffic assumptions likely to be less backward looking.
• Stronger cyclical effects than perhaps first assumed.
Greater attention on market fundamentals:
• Globalization or regionalization?
4) Barriers to
Paying attention to competition drivers:
Entry: Competition • Growth may no longer mitigate competitiveness as it did
matters
previously.
• Transshipment a particularly vulnerable segment.
5) Amortization:
Modest times
Volume & pricing assumptions more modest:
• Longer amortization periods.
• PPP rent sharing more probable.
The New Normal
■ Trend 1: Rebalancing short-term and long-term benefits
• Short-term investor gains against long-term performance improvements.
■ Trend 2: Redefining public involvement
• New forms of Public-Private Partnerships (PPP).
• Towards a revision of conventional concession models of a landlord port
authority (i.e. awarding system, performance, concession fee system,
etc..) ?
• Private sector has a lower tolerance to risk.
■ Trend 3: Refocus on resource management
• Operations, and resources and asset optimization.
The New Normal
■ Trend 4: Reassessing portfolios, vertical disintegration and
consolidation
• Low valuations could offer potential for mergers or acquisitions.
• Shipowners’ interest in investing in terminals?
■ Trend 5: Restrictions in getting finance
• Ports should be considered as long-term investments.
■ Trend 6: Dealing with mature markets
• Low to moderate long-term growth perspectives.
• Shift towards quality of service instead of growth.
Conclusions: Rebalancing Trade and the Balance
Sheet
■ Paradigm shift
• Risk that was traditionally highly embedded within the
industry has been obfuscated.
• Port terminals as abstracted bundles of financial assets and
liabilities: “Financialization”.
• Better understanding:
• Global trade dynamics
• Financial and monetary cycles.
• Capital misallocations.
• Recreation of embeddedness:
• Through intermodalism and supply chain integration.
• Cluster formation and governance.