Despite improving transaction characteristics for container lease securitizations, the sector still faces some risks that could prevent deals from earning 'A' ratings, Fitch Ratings warns in a research report published today.
Container lease ABS issuance this year is on pace to surpass all-time high 2012 levels of over $2.5 billion. 2013 has already seen six transactions close, totaling $1.73 billion, outpacing last year’s record tally through June.
But recent advance rate trends, lessee concentration, overproduction risks, and the risk shipping lessee companies defaulting could keep deals from earning 'A' ratings.
Advance rates have been rising to the low to mid 80’s, which may not provide for sufficient protection under a ‘A’ stress. And on the back of strong container lessor performance, there has been the urge to overproduce containers, which could impair asset performance, Fitch stated.
Additionally, the container leasing industry, and subsequently container lease securitizations, is very concentrated, with the top 10 lessors accounting for up to 45%-75% of the aggregate collateral in a typical deal.
However, Fitch is seeing some improvements in these areas. Fitch has noted lower concentration levels of the top 10 lessees in recent transactions.
Overall, Fitch predicts that the single biggest risk to container lease ABS is the risk of lessee (shipper) defaults.
Shipping companies generally exhibit high amounts of operating leverage, with commensurate non-investment-grade ratings. Given the concentrated shipping industry, the risk of a single lessee causing a catastrophic default is higher and the global nature of the industry means that recovery rates, given a default, remain an uncertainty, said Fitch.
And the capital-intensive shipping industry is is seeing signs of struggle due to economic conditions, funding scarcity and supply-demand imbalances. Revenue remains challenged by depressed freight rates, due to both slow economic growth and a continuing oversupply of containerships. Profits are futher surpressed by high costs led by rising fuel prices.