CAI International, one of the smaller players in the global shipping container lease business, is out front with the industry’s first asset-backed deal of 2018.
The $250 million transaction, Cal Funding III Series 2018-1, securitizes shipping-line leases of 170,104 marine cargo ship containers with a net book value of $573.2 million that are operated by CAI affiliate Container Applications Ltd. (CAL).
The offering includes $238 million in Class A notes that have a preliminary A rating by S&P Global Ratings. A $12 million Class B note class is rated BBB.
The collateral for the notes has an above-average concentration in dry containers (70.5% of total book value), a segment of the industry that historically has been more sensitive to industry downturns, according to S&P. There is also an unusually low concentration of refrigerated specialty containers (18.44%).
The portfolio is also concentrated in terms of lessees: the top three shipping companies account for 48% of leases, a factor that prompted S&P to slightly increase the default assumption rate used in stress scenarios to rate the pool. Lessee concentration is an important risk factor: The bankruptcy and operational collapse of the South Korean shipping liner Hanjin Shipping in mid-2016 left hundreds of thousands of shipments delayed in transit, and put creditors on the hook for $10.5 billion.
Payments on Cal Funding III notes will come from lease receivables as well as net proceeds from the trust’s sale of containers in the fleet. Cal Funding III can add new containers to the pool, subject to concentration limits.
There are several early-amortization triggers designed to protect investors that require additional overcollateralization should CAL default or the interest-coverage ratio for the 2018-1 series fall below 2.5x for four consecutive note-payment dates. Another trigger is an increase in the average age of the equipment beyond 10 years. However, that would represent a large increase from the current age of 2.36 years, according to S&P.
The deal is the first for the Barbados-bases CAI since June 2017, when it completed a $253 million transaction. CAI has the smallest market share (5.6%) behind four other lease-container firms, as well as a below-average lease rate ($1.32 per diem) compared to larger firms such as Textainer International and Triton International.
Issuance of container lease ABS picked up last year following a two-year lull, helped by a continued rise in global trade and a 55% rebound in container prices, which made it difficult for shipping companies to outfit their own fleets. There were seven deals in 2017 totaling $2.76 billion, according to a recent report by Moody's Investors Service. By comparison, there was a single deal in 2016, a $140 million offering from SeaCube Container.
In January, S&P said that it expects issuance to remain active this year, as the “cost of capital is [still] lower for the marine cargo container lessors because they have taken advantage of increased asset-backed securities (ABS) financing.” S&P does expect the pace to be as frenetic as last year, however.