Most US ports have sufficient liquidity and cash on hand to weather what is expected to be a 20 percent decline in cargo volumes during the COVID-19 pandemic, according to an analysis of the ports’ financial health by Moody’s Investors Service.
However, the ports’ financial resilience — derived from fixed payment requirements from terminal operators, stevedores, shipping and cruise lines — could pressure the investors that back those private-sector interests to ramp up their support if the trade disruptions from COVID-19 are prolonged.
Whether terminals and carriers are able to make their multi-million-dollar annual lease payments will depend upon the financial support they receive from the investors that back them. “Tenants associated with global shipping lines, cruise lines and major industrial or energy companies, or tenants owned by institutional investors, usually have the financial capacity and operational incentive to sustain the tenant’s operations in periods of economic stress,” Moody’s said in its report, released Wednesday. Investors have generally supported their clients during times of stress, such as the 2008-09 financial crisis, it added.
Moody’s also compared the different strengths and challenges of landlord ports such as Los Angeles, Long Beach, and New York-New Jersey, with the operating ports in the Southeast.
Landlord ports benefit from high levels of guaranteed annual payments from tenants known as minimum annual guarantees (MAGs). Under those arrangements, terminal operators guarantee the port authority an annual amount of revenue. At container ports, the MAG is quantified in annual TEU volume; the terminal operator is responsible for paying the MAG whether or not it generates the stipulated volume.
Landlord ports receive 40 to 70 percent of their revenue in the form of the guaranteed payments under long-term leases. “The landlord model has historically proven to stabilize revenues in periods of volume declines,” Moody’s said.
Operating ports more exposed to cargo declines
Operating ports, by contrast, retain operating responsibilities and receive most of their revenue from cargo throughput or customer use, leaving them more directly exposed to declining volumes. But operating ports, in times of economic stress, can address their largest cost factor — labor — by adjusting staffing levels and work hours in line with lower activity, Moody’s notes.
“Port operators exhibit greater revenue volatility through volume cycles — in growth and contraction — and generally have lower margins because of the more labor-intensive scope of their operations than landlords, which amplifies the challenge of high-revenue volatility in periods of stress,” the analyst said.
However, most US ports have entered the current period of instability with enough cash on hand to cover 12 months of debt service and operating expenses during the anticipated period of declining cargo volumes.
“All US ports that we rate have at least 12 months of liquidity coverage under a severe stress scenario, and most ports are even stronger, with the median ports having over 25 months of coverage,” Moody’s said. “Most rated ports had a debt-service coverage ratio (DSCR) of at least 2.0x — and more than half had a DSCR over 2.5x — which provides a strong position from which to absorb and manage revenue pressures.”
In fact, about half of the ports that Moody’s rated have lower debt-service requirements today than they had in 2007-08 at the dawn of the economic recession. “Current debt service expenses for these entities remain modest at less than 20 percent of revenue,” Moody’s said.
US ports and their tenants, on top of weathering the decline in cargo volumes, face additional expenses during the COVID-19 crisis tied to cleaning their facilities and procuring personal protective equipment. Organizations representing both landlord and operating ports, as well as marine terminal operators and stevedores, are seeking federal help to assist in meeting those unanticipated costs. The scale of federal help needed isn’t clear yet, but proposals so far are for a seaport grant program up to $1.5 billion, and another $400 million for PPE and cleaning supplies.
In a May 4 letter to Congress, Federal Maritime Commission members Carl Bentzel and Louis Sola urged that legislators consider “a means to help alleviate and bridge the financial gaps that could jeopardize continued healthy operation of our domestic marine terminal industry and of our maritime transportation systems.”
As for port authorities, most ports’ strong positions in regard to debt service coverage, combined with their healthy level of liquidity, should shield them from severe financial stress during the COVID-19 crisis.
“Coverage and liquidity are key factors in an environment like this because they provide financial flexibility for ports to manage unanticipated revenue disruptions, force majeure claims, requests for rent deferrals, or extraordinary expenses,” Moody’s said.