The Port of Tacoma faces a financial dilemma.
Unless port officials can reach agreement with banks to do otherwise, the port faces the prospect of issuing $230 million worth of bonds intended to finance a container terminal it no longer needs.
Otherwise, the port could end up paying banks more than $24 million to extricate itself from bond financing agreements.
The port’s treasurer, David Morrison, told port commissioners this week he believes the port can work a deal with its bankers that makes both of those potentially painful scenarios unlikely.
Morrison is talking with Dexia Credit and Merrill Lynch Capital Services about a complicated new deal that could even save the port money in the future.
The port is talking with those financial institutions because it signed financing deals two years ago that obligated it to issue bonds to finance its ambitious Blair-Hylebos Project. That project was to create a new terminal for NYK Lines at the port.
But the port and NYK cancelled the terminal deal in midstream last year when container volumes plummeted with the recession. Instead, NYK signed a lease for an existing port terminal vacated by a shipping line that moved to Seattle.
Though the terminal project is now on ice, the port’s obligation to issue those bonds remains, Morrison told the commission.
The port made those advanced arrangements under a complicated interest rate swap deal with Dexia and Merrill Lynch to lock in money for construction at a fixed rate.
Under terms of those complex deals, the port can’t simply decline to issue the bonds without paying termination fees to the banks totalling $24.2 million. Those termination fees vary depending on the prevailing interest rates.
Morrison hopes to craft a new deal with those institutions to allow the port to substitute some existing bonds for some of the new bonds it would have had to issue.
A new deal makes sense if the port has capital projects to finance at the time the bonds must be issued in 2013 and interest rates are more than the agreed 4.13 percent, Morrison said.
“I was looking back at what the port was paying in the ‘70s, and we were paying eight to 10 percent,” said Morrison.
But past experience, he noted, is no sure predictor of future events.
When the port entered the interest rate swap agreements with banks before the recession, the deals appeared to be prudent.
“Who could have predicted that Lehman Brothers, which had a AAA rating one day would be bankrupt the next?” asked Morrison. “Who could have predicted the housing finance collapse? Who would have foreseen the drop in the port’s business?”
Lehman Brothers was one of the so-called “counterparties” on bonds the port issued to pay for the initial work on the NYK Terminal.
“We had a signed contract with NYK before we made these agreements,” he said. “Who could have anticipated it would be canceled?”
Port commissioners told port staff members Tuesday they were concerned by the port’s financial dilemma. Even if Morrison is successful with his negotiations, said Commissioner Don Meyer, the fees and rate adjustments involved could be expensive at a time when the port has laid off staff and cut back maintenance to save money.
“I don’t think we’ll be able to get out of these agreements for nothing,” Meyer said.