Fitch Ratings released a report yesterday about assessing the risk of container ABS, which is a cyclical asset class.
The sector seems to be worthy of a closer look as Fitch said that its need for the capital markets has increased with container lessors still expanding production. This is in an effort to maintain parity with rivitaiized trade flows, according to Fitch. At the same time, the decreased availability of European bank funding has the container segment seeking the capital markets for its financing needs.
This need is manifested in the higher volumes in the container ABS asset class. After a three-year lull in the intermodal container lease ABS sector, 2010 saw the first post-crisis issuance in the sector.
Futhermore, in 2011, the sector followed up its revival with six new ABS deals, which is the heaviest annual issuance of the asset class in terms of number of offerings. Last year saw $1.49 billon worth of transactions, which was second only to 2006 in terms of dollar amount at $1.9 bilion with three deals.
However, the rating agency said that these transactions are not really without risk. Although transaction performance has been steady, the high cyclicality of the industry, according to Fitch, neccessitates closer scrutiny of deal mechanics, specifically credit enhancement levels. Fitch thinks that higher enhancement is appropriate considering the current dynamics in the industry.
Container ABS deals are usually structured to achieve an 'Asf' rating, Fitch stated. Even with the challenging industry dynamics, the advance rates on new issues is still over 80%. Considering the level of risks in the container industry, it is not likely that the rating agency would be able to give an 'Asf' rating to these levels of advance rates.
Fitch stated that recent utilization rates in the sector have been unusually high. But, with a glut of vessels in the shipping industry as well as a shortage of containers, the current environment has been quite positive in terms of utilization rates. However, the rating agency said that the imbalance is not likely to go on longer term.
There is also the aspect of high industry cyclicality. Like other transportation industries, the global container leasing industry has shown significant cyclicality and is reliant on the global economic environment. Fitch has examined this cyclicality as it impacts container utilization and lease rates as well as asset values, which are the main sources of revenue for container lessors.
The rating agency said that container overproduction risk is rising. Higher utilization rates across the industry have created an incentive for lessors to increase container production. Considering that there are low barriers to container production, this overproduction is entirely possible. Container oversupply would apply downward pressure on uitlization and lease rates as well as asset values, Fitch stated.
Meanwhile, the rating agency also said that lessee default risks remain high with global shipping firms still experiencing high financial pressure. The prices to ship dry commodities, Fitch cited, have dropped to 25-year lows recently, which has led to higher default risks in lessee shipping lines.