GALVESTON — The Port of Galveston will seek the city’s help in securing up to $13 million to pay for a cruise-ship terminal expansion after local banks balked at the lack of collateral waterfront managers could offer.
“In the banks’ eyes, it was a risky loan — an unsecured line of credit,” Port Director Michael Mierzwa said.
Securing financing to expand Cruise Terminal 2 is crucial to meet obligations to cruise lines seeking to add more and larger ships to their Galveston lineups.
Mierzwa had hoped new contracts forged with cruise lines this year would have been enough to assuage bankers.
Port staff initially sought the loan through the Galveston Port Facilities Corp., which the Galveston City Council created in 2003 as a financing mechanism to help pay for waterfront improvements. Among other ventures, the corporation leases the island’s two cruise terminals. Although the Port Facilities Corp. generates some revenue, it doesn’t have enough assets to satisfy lenders.
Finding ways to offer more collateral became too complicated and the potential interest rate ticked up each time port officials met with lenders, Mierzwa said.
“The interest rate was getting higher every time we talked,” Mierzwa said.
The Wharves Board of Trustees, which governs the port, last week approved a resolution requesting the city to issue subordinate lien revenue notes to finance improvements at Cruise Terminal 2 and other related improvements, which would allow the port to handle larger cruise ships and the related increased passenger volumes at the terminal.
The port is a utility of the city, but not supported by taxes. The Galveston City Council must agree to issue the notes, which would be privately placed with banks and not sold in public markets.
Bankers would feel more comfortable were the city to issue the notes, officials say. The city, however, wouldn’t be on the hook to repay the loan if the port were unable to service the debt. The notes will be payable from and will be secured by the net revenues derived from increasing cruise business, officials say.
The port already has $55 million in debt, largely from investments in terminals to accommodate cruise ship business. Subordinate debt works essentially like a second lien. If the port defaults, any first or senior lien obligations would be paid before the subordinate lenders receive any repayment of their obligations.
The biggest risk to the city would be a smudge on its credit if the port were to default on the loan, officials say.
In January, the wharves board approved a five-year agreement with Royal Caribbean Cruises. Royal Caribbean said the agreement would mean more island sailings this year and next and also promised to bring a larger vessel to Galveston if the port made improvements to Cruise Terminal 2 to accommodate more passengers.
Also this year, Carnival Cruise Lines announced it would bring a third ship to Galveston on the condition of timely improvements and expansion of Cruise Terminal 2.
The port collects passenger fees and also generates revenue by charging cruise passengers to park in port-owned lots. The yearly incremental increase in passenger revenue from the additional vessels is projected to be $2.4 million, with projected incremental increase in parking revenues of another $2.4 million, port officials say.
Officials said they were confident the loan could be repaid fairly quickly with new revenues from its fast-growing cruise business.
It was unclear Tuesday when the City Council would consider the port’s request. But Mierzwa said he hoped it would be soon. Going through the city likely would result in a lower interest rate, officials said.
Cruise business is vital to the port and the city, officials have said.
Last year, cruise activity generated $43 million in passenger onshore spending, according to a report by the Galveston Island Park Board of Trustees,
The port this year projected operating revenues of $26.9 million, with a little more than $10 million of that coming from cruise-related operations.
“I hope they approve it,” Mierzwa said. “Without this money, I won’t be able to do the improvements I have to do in order to get bigger ships.”
Mierzwa would like crews to have substantially completed work by May to double the size of the Cruise Terminal 2, expanding it from 150,000 square feet with the capacity to seat about 1,000 passengers.