Sea Containers, the Bermuda-based marine shipping container leasing company that filed for bankruptcy protection last week, is struggling with an inefficient capital structure and $467 million owed to more than 20 of its largest creditors, but market participants say the company should be able to keep its covenants related to its ABS transactions.

Whether the Bermuda-based company's insolvency will impact the equipment-leasing sector is still unclear. The asset class is a relatively small one. Issuers completed less than five transactions in 2005 and 2004, according to ASR's database.

"There has been limited issuance in this sector," said Joseph Tuczak, a senior director in Fitch Ratings' commercial ABS group. Shipping container leases are fairly short-term, and require sophisticated managers to negotiate replacement leases as the existing contracts expire.

For its part, Sea Containers completed three deals, in 2002, 2004 and 2005, whose initial amounts totaled $1.2 billion. All of its transactions carried triple-A ratings, thanks to wraps from Ambac, according to market sources.

The company's secured debt is well covered. It completed a $161 million refinancing of ABS debt one week before the bankruptcy filing, and has about $60 million against vessels that it owns. Although the company may stop interest payments to the trusts during the reorganization process, those obligations will accrue and come due after they come out of bankruptcy, said one market source.

Ironically, the shipping container leasing business is currently going strong, a result of robust economic activity in China, Tuczak said. On the other hand, it is a fragmented and an inherently risky market. While lease rates have been strong for the last couple of years, a strong supply of vessels under construction has put downward pressure on shipping rates and leasing rates.

"When you've got more ships out there able to carry containers, that could put downward pressure on lease rates, which would impact the securitizations," Tuczak said.

Fixed-income experts, however, say that Sea Containers' problems stem from the fact that the holding company carries most of its debt burden, while most of its cash flow is tied up in its operating companies.

"They have the wrong capital structure," said one market professional familiar with the company. "It's not that they cannot support the debt. The debt is in the wrong place."

Furthermore, Sea Containers was unable to liquidate some of its valuable assets, including a 50% joint venture with Stamford, Conn.-based GE Capital called GE SeaCo SRL, through which it operates its marine container leasing business. Sea Containers can only cash out of that venture by declaring a dividend, but that option is not at their discretion, because they have a minority representation on the board of directors, one market source said.

Its structured debt obligations and its pension plan dilemma, present more pressing problems for the company. The filing only affects its Sea Containers Services Ltd., and Sea Containers Caribbean, Inc. subsidiaries. The company defaulted on $115 million of senior corporate debt due Oct. 15, which prompted the bankruptcy proceedings. This apparently happened after talks over two of its pension plan deficits stalled, according to the company.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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