Stung by the headwinds of the coronavirus pandemic and the U.S.-China trade war, global trade dropped by more than 18% in the second quarter, according to the World Trade Organization.
The collapse in volume was visible, according to S&P Global Ratings reports, with congested ports of entry in the U.S. and Europe, and bottlenecked shipping container use in Asian countries where stay-at-home orders were issued to stem the global spread of COVID-19.
But over the past month, a seemingly paradoxical trend has emerged in the securitization market for container leases and fleets: The previously moribund market has awoken with a flurry of asset-backed deals.
After more than a year’s absence of any ABS offerings, five marine-cargo container securitization deals came to market since the start of August. That included Triton Container Finance LLC’s record $1.365 billion transaction on Aug. 25 that refinanced four existing deals completed in 2017 and 2018.
That deal and Triton’s completed $312.9 million ABS offering the previous week were “certainly related to how strong the market is currently for container ABS,” said Michael Pearl, vice president and treasurer at Triton International.
The recent surge in ABS deals from container-leasing companies — which own about 52% of containers in use by shipping lines — reflects the convergence of multiple factors, including the 18-month issuance hiatus, ultra-low financing rates and a better-managed industry could prompt more such deals in 2020, according to market observers and participants.
“All these issuers wanted to get as much size as they could get done at a reasonable level, so they could retire debt and improve their financial conditions via lower interest rates,” said Paul Norris, managing director and head of structured products at Conning. “Investors love to hear that, because they get more bonds at a better level, and the companies issue debt at extremely low levels in terms of the overall rate—it’s a win-win.”
In Triton’s belt-busting deal, the leasing firm’s master trust priced a $1.3 billion tranche of single-A rated notes at a coupon of 2.11%, while marketing a BBB-rated, $65.8 million tranche at a coupon of 3.74%. Both notes carry an expected five-year weighted average life.
A five-year WAL is scarce for a fixed-rate asset, according to Wells Fargo ABS research director Dave Preston, and is attracting investors looking to diversify from risky bonds that are securitized by U.S. consumer debt.
Preston said many existing ABS deals in the container space are seasoned and in-the-money, making refinancing attractive, and the success of deals so far bodes well for more offerings. “There were down cycles in 2008 and 2009, and 2015 and 2016, but the performance of the senior notes has been good,” Preston said.
From an investor perspective, the yields are historically low, but pay better than corporate bonds with five-year maturities that now pay closer to 1%, Norris noted.
“A fixed-rate deal offering above 2% is actually very attractive, as strange as that sounds,” he said.
Norris added that significant demand from investors could have prompted Triton to squeeze spreads lower still, but in an unusual move the issuer decided to forgo additional rate savings if it reached the maximum deal size—a boon to investors.
The other recent container ABS issuers—Container Leasing International (d/b/a Seacube Containers LLC), Container Applications Ltd. and Textainer Equipment Management—took a similar approach, and in all issued more than $3.3 billion in ABS last month.
In 2019, only $725 million across two deals were issued for the esoteric asset class, according to market data from Finsight.com.
The slowdown in 2020 trade might have been expected to adversely impact the financials of shipping lines, creating significant counterparty risk for container-leasing companies.
However, a combination of several years of consolidation, a focus on managing fleet capacity and low fuel costs has led to a profitable 2020 for shipping lines, according to Wells Fargo’s Aug. 17 sector report.
“The container leasing is less at risk in a global economic downturn than other sectors involved in shipping,” said Preston, who is head of research for collateralized loan obligations and commercial ABS at Wells.
Wells Fargo noted industry news site Shippingwatch has reported that container shipping lines may produce combined profits of $9 billion in 2020. Wells expects more container deals this fall, partly because container-leasing companies started increasing container-box acquisitions in the second quarter.
According to S&P Global, even a decline in container usage globally for the remainder of the year will likely not negatively affect utilization and lease rates in the near-term for container leasing firms. The ratings agency’s current sector outlook states there is even a shortage of available marine cargo containers “due to lower rates of production and many marine cargo containers parked by inaccessible at storage depots.”
“As world trade resumes its upward trajectory, as already evidenced beginning in mid-2020,” the report stated, “the supply chain becomes less disrupted, [and] we expect costs, timing, and per diem rates to return to normal conditions over time.”
The lead time to manufacture the containers is a relatively short four to six weeks, according to Preston, enabling both the container manufacturing and leasing companies to ramp up or reduce business in a timely fashion.
That ability to reduce the risks of oversupply or undersupply became apparent in 2016, when one of the largest container carriers, South Korea’s Hanjin Shipping, unexpectedly went bankrupt, prompting fears of an oversupply of containers and widening spreads on container ABS.
That didn’t happen, Norris said, and the “moral of the story is that container companies have done a better job of not overproducing containers, so the price of container boxes doesn’t drop to very low levels.”
“If we have a global slowdown in GDP, that’s not great for containers. But with the other aspects being positive, people have confidence that these bonds are going to do very well,” he said.
Another plus, noted Preston, has been the industry’s switch from short-term master lease agreements to long-term leases that are typically five to seven years in duration, enabling companies to better weather market turbulence.
Container-leasing companies’ biggest weakness may be their customers: gigantic, mostly private shipping lines with large capital expenditure demands and thin margins. “It’s not a monopoly, said John Lampasona, director of Kroll Bond Rating Agency’s ABS commercial group. “But fewer than a dozen companies account for 80% of the market, and the top 20 account for 90% of total capacity, so you're dealing with mostly non-investment grade or unrated lessees that make up most of the market."
Nevertheless, Lampasona said, instead of cutting rates to capture market share, as they’ve done in the past, the shipping companies in the current economic downturn have canceled routs and taken ships out of service, to maintain rates at higher levels.
Norris said Triton’s $1.437 billion offering last month is a boon for the container ABS market because it provides investors with a benchmark.
“Triton has been a top performer, so now there’s a very large deal that will trade and provide more liquidity and better color and clarity about the market,” he said.
