The city of Rochester will begin making payments on interest and principal next February on the $40 million loan from Australian government banker Export Finance and Insurance Corp.-after making three interest-only payments since February 2006-to pay off its high-speed ferry.
With the expected sale this month of the ferry to German operator Forde Reederei Seetouristik Gmbh & Co. KG for $30 million, city officials estimate a debt of $20 million to be paid to the Australian banker over the next 14 years.
“The city will be able to manage its affairs here in a way that it can minimize the cost,” said City Corporation Counsel Thomas Richards, who negotiated the sale of the Spirit of Ontario 1 after two years of city ownership.
“But I don’t want to pooh-pooh it. I mean, $20 million with interest over 14 years is going to cost the city one helluva lot of money, and that’s too bad. I regret it, and if I could’ve done something to get rid of the rest of it, I would’ve done it.”
The city has paid $3.7 million in interest, including $1.35 million in February, city Finance Director Vincent Carfagna said. It paid $1.14 million in February 2006 and $1.21 million in August 2006.
The repayment schedule resulted from negotiations between the city and EFIC prior to Mayor Robert Duffy’s decision in January 2006-days after taking office-to abort the ferry venture.
“This was a fairly flexible arrangement so that we could pay interest for a while, which minimizes the burden on us,” Richards said. “We then have the flexibility in terms of being able to prepay, which we’re going to do, and also to fix the (interest) rate if they began to go up. If you have to have a loan, it’s a pretty good one to have.”
The city expects to cut its $40 million debt to EFIC in half with some of the $30 million from FRS.
“The only thing that I can say in defense of that is it’s better than $52 million, which is what would’ve happened if this (venture) had gone forward,” Richards said.
Carfagna would not disclose the amount of the scheduled principal payment for February 2007 but, excluding money that would come from the sale of the ferry, roughly $2.8 million would have to be paid annually to pay off the debt by 2019.
“If we cut the debt in half, we cut the principal payments in half, and likewise dramatically cut the interest we’re paying because we’re paying on a limited principal,” Richards said. “And, of course, the interest payments are calculated on the remaining principal, not the total, so they change all the time.”
Principal payments are fixed, like a fixed mortgage, Richards said.
“Interest is paid in February and August,” he said. “It’s a floating rate, at LIBOR (London interbank offered rate) plus 1 percent.
“We have the option at certain times during the agreement to fix the rate. Were we to decide that it would be in our interest, with the rate declining, to fix the rate, we can do that as well. That’s one of the judgments we need to make. That option continues through the course of the loan.”
Proceeds from the ferry sale will be used only for ferry-related expenses, Duffy said. They will not be used to help cover a projected $21 million shortfall in the 2007-08 city budget.
The city authorized a $9.4 million loan from its reserve funds to the Rochester Ferry Co. LLC early in 2006 to pay off outstanding ferry debt, including $2.5 million to ferry operator Bay Ferries Great Lakes Ltd. Some $7.5 million of that loan has been used, Richards said.
“We’re not just paying off the debt with this,” Richards said of the $30 million. “We’re also paying back the money that was advanced by the city. We take care of the other obligations of the ferry company, in connection with closing and all those other things. And we still have $20 million left to pay down the debt.
“While it’s true that that isn’t being used to deal with this present (budget shortfall) problem, obviously by paying that money back to the city we give them much more flexibility. We give them money that they have some control over that they did not have before.”
The city bought the ferry for $32 million at a foreclosure auction in February 2005. Private owner Canadian American Transportation Systems LLC shut down the Rochester-to-Toronto service in September 2004 because of financial problems. As part of the acquisition, it inherited the $40 million EFIC loan.
The ferry has cost the city more than $12 million since it was purchased, officials said.
The city thought it had a buyer in May 2006 when it announced that U.K. startup Euroferries Ltd. had agreed to buy the boat for $29.8 million. Euroferries never followed through with financing.
“By (last) June we were looking for other buyers, and we canceled their agreement in July of 2006,” Richards said. “From July of 2006 to now we’ve had no obligation to Euroferries.
“That was a judgment we made, that it was better to clear the decks and work the marketplace and try to come up with a better offer (rather than) get stuck fighting with Euroferries.”
As part of the agreement, Euroferries pledged to reimburse the city for the cost of docking the ferry at the Port of Rochester in Charlotte. In cutting ties with Euroferries, Richards said, the city agreed not to pursue those payments.
This time, FRS was the highest of three interested bidders, Richards said.
“This is the highest price we’ve ever been offered for this vessel,” he said.
“There were less people interested this time around, but the people who were interested were, I think, more serious, and probably had better (financial) capability. That’s why the price was higher.”
None of the three interested buyers this time were in the mix last year, Richards said.
“There is no blue book on fast ferries,” he said. “The value to someone who buys it is what they can do with it. Why would somebody pay more for it this year than they would’ve paid last year? The answer is, they can do something with it. It isn’t depreciation that drives the value; it’s commercial capacity.”
The net return for the city will be roughly $100,000 less than the terms of the agreement with Euroferries, Richards said, in part because both the city and FRS commissioned brokers. The city did not use a broker as part of the Euroferries sale.
“When this process started, in January of 2005, the (CATS) ferry company was insolvent,” Richards said. “There had been a technical default on a $40 million loan, which means it could’ve been called. And, because it owed over $3 million, maritime liens could’ve been filed against the vessel.
“We’ve managed to get that straightened out, so that we did not have a default on the loan or maritime liens on the vessel. We’re going to be able to pay back all that money we owe, plus what we’ve accumulated with obligations between then and now, and still reduce the debt by half.”
Halving the debt was the best the city could hope for, Richards said.
“That was our goal all along,” he said. “It took longer than I had hoped, and it was tougher than I thought. But in the long run, that’s what it takes to get through situations like this and keep your eye on the long-term ball, which is in the interests of the taxpayers of the city.”
The transaction needs the approval of the board of the Rochester Ferry Co. and then by City Council at its April 17 meeting. Richards is spending much of his time now working with city finance officers fine-tuning ferry expenses since the announced sale to Euroferries.
“We’ll lay all this out in detail, including a projection of what the costs will be between now and closing,” he said.
Recent expenses will be covered by the $7.5 million extracted from the $9.4 million city loan, Richards said.
FRS representatives, including CEO Goetz Becker, rode the Spirit of Ontario early last month when it was moved from Halifax to Shelburne in Nova Scotia, where it has been docked since just before Christmas.
“The vessel is very exclusive by all means,” Becker said in e-mail correspondence. “It was very important to us to find the engines in an as-good-as-new status. The high standard at which the vessel was kept, especially the engines, was very important.”
The ferry will transport passengers across the Strait of Gibraltar from Tarifa, Spain, to Tangier, Morocco, Becker said.
The sale is subject to an inspection by the new owner within three days of delivery, Richards said.
“This vessel was not in class all the way back to January of 2005,” Richards said. “We brought it into class and did the work and the inspections in Halifax. The only thing we’ve done to it since is move it down to Shelburne. That’s why we’re really confident that we’re going to get this done.”
The sale likely will be closed in New York City, Richards said.
FRS, founded in 1990, employs 587 and offers six ferry routes and two bus routes, its Web site says. Its routes include ferry runs from Germany to Denmark, and from Finland to Estonia, and harbor trips in Stralsund, Germany.
Two ferries serve the Spain-to-Morocco route, which also includes a stop at Gibraltar.
“They’re a very credible company,” Duffy said.
The Rochester ferry will be invaluable to FRS, he added.
“We have been adamant about the value of this vessel,” he said. “It is an extraordinary boat. It really is a great asset to the city. To give it away for a quick sale would have been a disservice to the taxpayers of the city. Every dollar we’ve been able to get for this sale helps to pay down the debt.”
The sale of the ferry will not be the end of ferry-related financial issues, however. Among the priorities, Richards said, is to resolve the city’s contract with the Toronto Port Authority that requires Rochester to pay $250,000 annually for the next several years.
That arrangement could cost Rochester $3 million, Richards said.
“Our hope is that before we just abandon that contract and do what we have to do to settle our affairs with them, we’ll jointly look at whether there’s another option here for a ferry service,” Richards said. “For all the agony that occurred here, and for all the debate as to the wisdom of this particular project and ferry, it was a well-received idea.
“We can step back now, having learned a few things, and take a look at whether or not there’s potential for another ferry service. I’m sure it’s not going to be one the city funds, but maybe a more modest and reasonable one might be possible. We’d like to work with Toronto to see if that’s in the offing right now, before we disassemble this arrangement.”
Richards discussed the contract with representatives of the Toronto Port Authority last year, President and CEO Lisa Raitt said.
“The TPA had frank and friendly discussions with Mr. Richards,” Raitt said. “We remain open to talking to city officials regarding this matter and would expect to hear from them since the Spirit of Ontario is being sold.”
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4/6/2007 (C) Rochester Business Journal