Ratings of shipping container lease securitizations are closely tethered to those of their sponsors, and this once kept them in the triple-B range, before insurance. But recent transactions have garnered ratings as high as ‘A’, and analysts expect they could go even higher.
Container leases have always been trickier to securitize than leases on other kinds of equipment, such as railcars or aircraft. That’s because the leases tend to be short term: shipping companies own the bulk of their fleets, relying on leases of three to five years to manage fluctuations in demand to move goods around the world. However, term securitizations are typically structured with a 10-year expected maturity. This mistmatch means investors have to rely on managers of these deals to re-market containers that come off lease in order to generate cash flows to repay the notes.
Re-marketing isn’t the only unusual risk in container lease securitizations, however: investors also have to rely on managers to keep track of where the containers end up. In some cases, they must move the containers to locations where they will be more useful.
Because of this, “the manager fee is significantly greater than [in] the financial asset securitizations,” said Antony Nocera, senior director covering commercial and non-traditional ABS at Kroll Bond Rating Agency.
The upshot is that the rating of a container lease securitization is much more closely tied to the corporate credit rating of the lessor and manager than other kinds of securitizations, where servicers’ primary job is to collect payments and distribute the funds to noteholders.
Container leasing companies began issuing securitizations on a regular basis in 2001. Between 2001 and 2007, there were 11 issuances, all of which benefited from a financial guarantee from a bond insurer, according to Kroll. These deals were initially rated ‘AAA’ because of the financial guarantee but had underlying ratings in the ‘BBB’ range.
During the Great Recession there were no new deals issued due to poor capital market conditions including an inactive bond insurance market. This wasn’t a problem for container lessors, since they didn’t need to expand their fleets during this period.
When the economy started picking up in 2010, container lessors began growing their fleets to meet increased demand. Several companies reentered the securitization market to finance this expansion. Without the benefit of financial guaranties to enhance the transaction’s rating, eight new transactions were completed in 2010 and 2011 and received ratings in the ‘A’ category.
What changed? The container leasing sector now has had greater cashflow stability because the terms of leases have lengthened and shipping companies now have more responsibility for returning containers that come off lease. This reduces investors’ reliance on the manager.
Also, most of the securitizations completed before the financial crisis performed well through the recession. The deals withstood the stressful economic environment and paid all monthly interest and scheduled principal payments, providing evidence of the sector’s ability to withstand economic stress and volatility in international trade. This performance data gives rating agencies, and investors, more confidence in the asset class.
While noting that some companies are reluctant to share data, analysts at both DBRS and Kroll said that container securitization issuers have been transferring management more and more frequently, and have gotten pretty efficient at it.
“It’s a long-lived asset. You will have a few life cycles throughout the useful life of a container, meaning that it can be leased and re-leased several times and then leased again for under the long- and short-term agreements until it gets old,” said Sergey Moiseenko, senior vice president in the U.S. & European structured finance division at DBRS.
“What we see is structural improvements like manager transition accounts and managers transfer and manager trustee. There also exists strong empirical evidence of people taking over other people’s portfolios and integrating them successfully,” Moiseenko said during a telephone interview.
Nocera said that companies have cut the time it takes to transfer mangers and that this process is generally low cost. “Based on feedback from container issuers, it takes 30 to 90 days and the cost should be somewhat minimal,” he said.
He added that, while most container ABS deals don’t feature a back-up or replacement manager in place at the time of issuance, “hiring a replacement manager can be accomplished in a very short period of time and the transition should not be disruptive to the securitization.”
Another Kroll analyst, Brian Ford, associate director in the structure finance team, cited Textainer as a company that has successfully taken over management in the past.
Aside from manger transfers, there have also been a great deal transfers of entire portfolios.
According to research published by DBRS, in the five years from 2006 to 2010, there were 19 significant portfolio transfer or assumption events in marine container leasing sector with a total amount of about 3.3 million twenty–foot equivalent units (TEU), equivalent to approximately 75% of the combined fleet of the world’s two largest container lessors. The single largest transaction was the acquisition and integration of Interpool/Carlisle Leasing by a predecessor to SeaCube Container Leasing in 2007, which involved 970,000 TEUs.
With these transfers and assumptions there could be some “de-linking” of securitization rating from that of the manager’s rating, for example by assigning a low weight to the corporate rating, which could lead to higher ratings for these deals, DBRS said in the report.
But manager transfers aren’t the only structural improvements that could result in higher ratings these types of securitizations are likely to see.
Another is a shift to full finance lease deals, which have characteristics like full payout of value of underlying asset, according to Chuck Weilamann, senior vice president at DBRS also in the structured finance division.
“Financing leases, where the lessee makes lease payments covering the full value (or a significant portion) of the equipment or leases the equipment for the entire (or a significant portion) useful life of the equipment, and hence bears the risks related to ownership of the equipment,” Weilamann said during an email. “Because they cover the full value of the equipment, assuming the obligor satisfies its payment obligation under the lease, no re-leasing would be necessary.”
Still another structural improvement is the incorporation of older containers. Leasing companies that are fairly stable financially are buying older boxes from the shipping companies and leasing them back. Typical a marine container ABS is done with young collateral, two to four years of age or even maybe younger, but there is an interest in the industry from what we can tell based on inquires in looking to incorporate more of the older boxes in the collateral for marine container securitizations because they are still revenue generating assets and still hold residual value. They, standard dry freight boxes in particular, often go beyond traditional useful life,” said Moiseenko.
Adding senior subordinated structures, as opposed to the signal tranche deals so far, could also possibly bring higher ratings, according to Nocera. It’s unlikely ratings will go as high as ‘AAA’, he said, “but higher than others, yes.”
Shipping companies are willing to take on longer-term leases for two reasons: because containers do have very long lives in which they are still able to retain value and generate revenue, and because, during unfavorable market conditions, container companies are able to scale down their container purchases due to a shorter production time as compare to other equipment, like aircraft.
The typical production cycle for a container box is a few weeks, versus an aircraft which takes roughly two to six months to produce.
“Marine containers are a strong ABS asset to a large degree because, container companies have the ability to scale down purchases due to a fairly short container production cycle,” said Moiseenko.
This, combined with long-term ABS funding (including bank warehouse facilities), gives container companies, the “flexibility to ride the bumps along the way, even during fairly long and severe periods of turbulence, like the recent recession,” he said, noting, “container companies are opportunistic and have been able to manage the supply and demand equation well.”
Nocera said that financial problems at lessors have limited impact on the container industry, or on consequently securitizations. “The recovery of containers from defaulted shipping lines has not been a problem because leasing companies are proactive in reducing exposure prior to a default occurring. These companies have their ears to ground.”
So far this year, there has been $1.5 billion of issuance, compared with $2.7 billion for all of 2012 and $1.5 billion for 2011. Recent market volatility isn’t expected to have much of a negative impact.
“While we don’t see an immediate pick-up in activity, funding for the is asset class tends to be longer term with seasonal demand often driving issuance and generally less sensitive to short term volatility. We would expect issuers that have accessed the ABS markets to continue to view them as a valuable financing option, but are not anticipating any new entrants,” said Weilamann.