CMA CGM S.A., the world's third largest container shipping company, completed the first public shipping securitization in the industry last week.
The transaction builds on European aircraft securitization structures, enabling the issuer to finance 12 container ships through a combination of bond and bank debt.
The $499 million deal is being financed via two markets.
The 12-year, $254 million senior notes rated AAA' by Standard & Poor's and Aaa' by Moody's Investors Service are funded via the securitization in the capital markets. XL Capital Assurance-UK provides a monoline wrap on the notes that are rated an underlying A-'/'Baa1.' The unrated 12-year, $245 million Class B subordinated notes are funded via a pool of six shipping banks, including lead manager BNP Paribas.
A $300 million 144A/RegS corporate bond was issued by CMA to fund its purchase of the securitization's junior piece. All tranches are fixed rate.
A traditional bond offering would have targeted a mainly European investor base. This securitization was predominantly sold to U.S. investors.
"That's precisely the goal," said Richard Pfaltzgraff, a managing director in XLCA's commercial asset-backed securitization group. "There is not a lot of shipping that is done in the U.S. Most shipping companies are based in the Pacific Rim and Europe.
"If the financing is done via a U.S investor base, these companies access a different investor base. Fixed-rate deals tend not to really sell in Europe, and in the U.S. you have a lot of insurance companies interested in holding onto a fixed-rate investment."
The structuring is similar to the technique BNP deployed under its Iberia (ASR, 3/22/04) aircraft European Enhanced Equipment Trust Certificate transaction.
"We are dealing with a class of assets which can compare to the aircraft market in the U.S., though the legal environment is not applicable in Europe," said Helene Mizrahi-Walden, senior structurer at BNP Paribas.
Despite having the EEETC mold in hand, rating agencies had to build a new rating methodology for what is effectively the world's first publicly rated securitization of vessels. In the past, there have only been securitizations of shipping containers, shipping loans via collateralized loan obligations or whole business securitization, such as the U.K. ferries' whole business deals for the Isle of Man and the Isle of Wight (ASR, 4/22/02).
It's also the first time an EETC deal structure in Europe is rated by S&P.
One of the main difficulties in getting this deal off the ground was sizing the liquidity lines.
"It's a bit like an EETC, but there are some key differences," Pfaltzgraff said. "In an EETC in the U.S., there are specific provisions within the bankruptcy code that these deals are structured around. This deal was structured much more like a traditional ABS deal using a bankruptcy remote special purpose entity."
Though the deal is structured under English law, CMA is a French-owned company that benefited from the French bankruptcy law. If the company entered into bankruptcy proceedings in France, the decision to continue or to terminate the leases would be imposed on the owner by a court-appointed administrator, a process that could take up to three months.
Under the French bankruptcy law, the assets and operations of CMA could also risk being transferred to a new entity.
"Under U.S. law, the leases would just be stopped. In France, it's not as straightforward," said Nicolas Noel, corporate securitization originator at BNP. "The SPV is still the owner of the leases, and if the company doesn't pay the leases, it has to abide [by] the original terms of the leases. It's a more time-consuming procedure than in the U.S."
CMA obtains possession and rights to use the leasing arrangements, but the ownership of the assets rests with the special purpose entities. CMA will make absolute and unconditional lease rental payments to each owner SPE. They will be sufficient to repay debt service and other obligations of the owners and the issuer, as long as CMA is not insolvent. In the event CMA defaults, the liquidity facilities in place would allow the issuer to continue to service interest on the securitization for a period that should allow sufficient time for the repossession and sale or re-lease of the collateral.
The structure took nine months to complete.
"We are actively marketing to originate the next transactions," Noel said. "There are at least 20 companies worldwide that are capable of executing a similar type deal [and] diversification of funding sources is key to these companies, which do not necessarily have to be container ships operators."
Pfaltzgraff said at XLCA there have been several calls from investment bankers who have traditionally sought financing for vessels via the bank market who are looking to replicate this initial securitization deal.
"If you look at the container shipping business, it's very capital intensive and the industry has seen lots of consolidation," he said. "The capital required continues to increase as the industry grows. At the same time we've been seeing consolidation in the banking industry, so it makes sense to look at alternative sources of financing."
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