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Authority tries to lock up terminal deal

 

Jacksonville Business Journal - by Tony Quesada Staff Writer

JACKSONVILLE -- The Jacksonville Port Authority's No. 2 executive will be in South Korea the week of March 17 working to finish a development and lease contract to build the port's biggest container terminal.

The authority and Hanjin Shipping Company Ltd. have been negotiating since signing a memorandum of understanding Oct. 18, 2007, at Hanjin's headquarters in Seoul, South Korea, regarding a proposed 170-acre terminal.

Negotiations have been tough, said Ron Baker, the authority's chief financial officer and deputy executive director, with both sides looking out for their stakeholders' interests. But despite the memorandum of understanding's expiration date looming in mid-April, he's confident his trip will close or nearly close the deal.

The memorandum of understanding calls for the port authority to finance $230 million to develop the terminal and $120 million to pay for equipment and other operational resources. It also calls for Hanjin to pay the principal and interest on such financing.

"We've been crystal clear from the outset that the financial responsibility for the terminal will be theirs," Baker said. "If someone wants to come here, they have to have skin in the game."

The time between the initial announcement and signing a lease contract has been longer than what was seen with Mitsui O.S.K. Lines Ltd., which will open a $230 million, 158-acre container terminal in January 2009.

While the cost to develop a Hanjin terminal is significantly greater than for Mitsui, due to higher costs for new equipment, the main reason it's taken longer to craft a contract is the complexity of the financing, Baker said.

That complexity results from the greater availability of financing options, Baker said. He will be accompanied in Korea by two lawyers from the law firm Bryant Miller Olive PA, which specializes in structuring public project financing, including public-private partnerships.

Mitsui made its terminal deal relatively simple by agreeing to pay most of the debt for the project: $100 million in special purpose bonds, a $50 million State Infrastructure Bank loan and $45 million in port authority bonds. All but a few million dollars of the authority's share was paid by a state grant.

Hanjin could do something similar to assume the debt burden on its own, but it's equally, if not more, possible that there will be other financial participants. Perhaps the most likely is Macquarie Group, a Sydney, Australia-based investment and financial services company with funds invested globally in multiple areas, including port infrastructure.

The Macquarie Korea Opportunity Fund has a relationship with Hanjin, having bought a 40 percent stake in six Hanjin terminals in 2006, including Oakland and Long Beach, Calif., and Seattle. The others are in Tokyo and Osaka, Japan, and Kaohsiung, Taiwan.

Pension fund

A third option is to include a pension fund as an investor. Pension funds have increasingly invested in port infrastructure. The Ontario Teachers Pension Fund recently bought the lease to operate a terminal in Staten Island, N.Y., and a major piece of a container terminal in Canada.

Baker and others attribute the trend to an alignment of ports' long-term stability with pension funds' financial goals. "We've found them to be patient investors."

The authority plans to issue a request for information soon seeking interest from pension funds about investing in port infrastructure in Jacksonville, not limited to the Hanjin terminal project.

The simplest option, a pure lease in which Hanjin would guarantee revenue and debt service, appears the least likely. Although easy to structure, it would "leave money on the table if we do [a deal] just between" the authority and Hanjin, Baker said.

Involving a company like Macquarie or a pension fund is a new concept for the authority -- something not in the discussion when it was negotiating with Mitsui. The authority has had to devote time and energy to understand the legal aspects and implications of having third parties participating in a project's financing.

Besides the greater number of possible financing mechanisms to evaluate, Hanjin differs from Mitsui in the degree to which it wants to be involved in terminal design and construction, Baker said.

"They have some technology solutions for efficient terminals that they want to integrate," he said. The total contract "has a lot more moving pieces."

Although the Hanjin memorandum of understanding expires in about a month, Baker said the deal would not be in jeopardy if negotiations are not completed by then because Hanjin is committed to being in Jacksonville. While other companies have signed memorandums of understanding with the authority that never led to leases, Hanjin's culture affords it greater weight. The Hanjin memorandum of understanding's 180-day negotiating period was an "arbitrary" time frame.

"The sole purpose of the [memorandum of understanding] was for Hanjin to say Jacksonville is the place they've selected," Baker said. "They are very committed to Jacksonville, period. They realize from a strategic perspective that Jacksonville is the place to be."

Still, Jacksonville's strategic value to Hanjin hasn't inhibited the company's executives from negotiating hard and taking their time.

"We'll get it done," Baker said. "We haven't run across any deal breakers."


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Revised: February 10, 2010 .

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