Leasing rates for tankers have fallen sharply as oil prices decline and participants wait for new U.S. safety standards to take shape. So it would seem like an inopportune time to tap the securitization market to fund railcar leases, particularly for a first-time issuer.
But that is exactly what Napier Park Global Capital, the hedge fund spun out of Citigroup, is doing.
On Monday, the firm launched a $259.8 million offering of bonds backed by railcar lease payments, according to Kroll Bond Rating Agency, which is rating the transaction.
The deal, dubbed NP SPE II, will issue two classes of senior notes, both provisionally rated ‘A’ by KBRA. The $103.3 million tranche of class A-1 notes will amortize over a 10-year period, while the $156.545 million tranche of class A-2 “soft bullet” notes are expected to be paid off in a single payment in April 2026, but may not be repaid in full until sometime after that date.
The notes are backed by a pool of 2,905 railcars with a fair market value of approximately $342 million acquired by the trust from Trinity Industries Leasing Co.
The securitization trust will also enter into a rental sharing agreement with RIV II, a joint venture between Napier and Trinity that owns 476 railcars. Under the agreement, NP SPE bondholders and RIV will pool their lease revenues and Trinity will distribute them according to their pro rata percentages of the total fair market value of the combined portfolio.
Trinity will service both portfolios and manage the rental sharing agreement. At closing, bondholder’s railcars will account for approximately 90% of the total fair market value of the combined portfolio.
This agreement diversifies the sources of bondholder cash flows, according to KBRA. That’s because RIV’s portfolio has a smaller proportion of tank cars; as a result, the share of tank cars in the combined portfolio is 48.4%, down from 52.1% of the securitization trust’s portfolio. KBRA views this diversification as a credit positive. In addition, the securitization trust bears the costs associated with only its own assets, so this diversity comes at no extra cost.
The majority (89.2%) of bondholder’s fleet at closing are under a full service lease, in which the lessor is responsible for maintaining and servicing the railcars, administering and paying applicable taxes and providing ancillary services to the lessee. The remainder (10.8%) of the fleet at closing is under a net lease, in which the lessee is responsible for all maintenance, applicable taxes and expenses.
The lease rate for full service leases is typically higher than net leases.
In the event the agreement is terminated prior to the repayment of the notes, bondholders will retain 100% of the future lease revenue generated by the railcars in its own portfolio to service the debt on the class A notes.
Noteholders also benefit from a liquidity reserve account sized to nine months of interest payments at closing, which will be used to cover shortfalls on fees and interest payments.
Credit Suisse Securities and DVB Capital Markets are the initial purchasers.
The railcar industry is capital intensive; operators are required to purchase expensive equipment as well as make modifications to older products in order to remain compliant in an increasingly regulated environment. A federal law passed in May 2015 established new safety requirements for tank cars, including enhanced braking mechanisms and restrictions on continuous blocks of cars carrying flammable liquids such as crude oil. Another law passed in December 2015 introduced further safety standards that apply to any individual cars carrying flammable liquids.
Napier is an employee-owned investment management firm that invests in a broad range of products, including CLOs, diversified credit funds, and cash-generating real assets. The firm got into the railcar business two years ago, when it formed a partnership with Trinity to acquire about $1 billion of railcars.