Surge in container demand steering lessors to securitization
Global trade is growing, but few shipping companies are in a position to add to their own fleets of containers, in part because of rising steel prices. This is pushing container leasing rates higher, making it feasible for lessors to access financing in the securitization market once again.
So far this year, four lessors, Triton, Textainer, SeaCo SRL, and Container Leasing International (d/b/a/ SeaCube) have issued a total of $1.34 billion in five deals.
That’s a big increase from 2016, when a single, $140 million deal was issued.
For the past couple of years, both shipping companies and, by extension, container lessors, have struggled amid overcapacity. In August, South Korea’s Hanjin Shipping Co., the world’s seventh largest line, filed for bankruptcy, delaying hundreds of thousands of shipments around the world. Other players have joined forces.
The shakeout reduced capacity, and now that business is picking up, containers are back in demand. "The reason you’ve seen so many issuers is that the container leasing market has recovered a lot in terms of both higher container price and higher lease rates,” said Jing Xie, an analyst and director in structured finance at S&P Global Ratings. Last year, the lease rate for ships had slipped to as low as 25 cents per diem for 20 feet dry containers, “but now we’re seeing 70-80 cents,” he said. (Per-diem rates are daily rates based on averages of five-year or longer lease terms).
In May, Moody’s Investors Service issued a stable outlook for the global shipping industry, predicting a swing to profitability this year. Still, shipping companies are not yet in a position to add to their own fleets of containers. A new unit that sold for less than $1,500 per cost-equivalent unit (CEU) last year, is now commanding about $2,200 CEU, according to container industry officials. (A standard 20-foot dry container is considered one CEU, or a TEU – twenty-foot equivalent unit – meaning that larger containers such as 40-foot units cost roughly double).
Growth in trade (the World Trade Organization expects 2.7% this year) isn’t the only thing driving up the cost of containers. The cost of Chinese-made cordon steel – the primary composite material used for new containers, has more than doubled since December 2016. “Steel is roughly 50% the cost of the components in a dry freight container,” said Moody’s senior analyst Benjamin Shih, a senior vice president on the structured finance team.
Another cost factor was the conversion of many Chinese container manufacturers to add eco-friendly waterborne paint systems to replace solvent-based operations – a process that has slowed down production because of employee training, new drying conditions and added quality control measures, Triton’s president, Simon Vernon, explained in the company’s May 11 first-quarter earnings call with analyst. “This is obviously impacting the flow of new containers coming to market at present and restricting supply,” Vernon told analysts.
Container lessors, by comparison, are entering the recovery in much stronger financial positions. Prior to the rate recovery, most were able to manage their managed their curtailed inventory and operational needs more cost effectively through bank warehouse and revolving lines, according to S&P’s Xie. (Triton, for instance, has $1.53 billion in term loan facilities along with a warehouse line ($666.2 million outstanding) and a standalone warehouse for asset-backed transactions ($660 million outstanding).
Several had extended five-year (and in Triton’s case, seven-year) contracts with many of their clients prior to the trade fall-off, shielding them from further revenue strains. New and renewed leases now are at rates equal to peak 2014 levels, according to Moody’s.
Moody’s reckons that lease rates climbed about 60% on average in the first quarter from historical lows in 2016. “If container prices continue to increase,” the rating agency said in a May report, “per diem lease rates for both new and used containers will also rise, which will help improve the ABS transactions’ flows.”
Going into the year, many expected the rates to remain flat at 2016 levels. S&P published lease assumption rates of 57 cents per diem for the standard 20-foot dry containers, narrowly down from the 2016 forecast of 60 cents. (The agency has not published any revised estimates for the remainder of the year.
For Textainer, that fact that 83% of its contracts are on long-term leases – and only 7% of those are maturing in 2017 – the company is shielded from interest rate reductions and supplying it with 120,973 containers to pool for its $420 million Textainer Marine Containers V Ltd. Series 2017-1 deal (upsized from $300 million) with a five-year expected maturity.
“This is our first ABS in over two years and follows a significant recent improvement in the container leasing market,” said Hilliard C. Terry III, Textainer’s executive vice president and chief financial officer, in a press release.
The deal, through RBC, Bank of American Merrill Lynch and PNC, was “significantly oversubscribed,” according to a company release, with proceeds to be used to redeem short-term debt.”
Triton’s two deals comes as the company completes the merger with the former TAL International Group amidst rising earnings ($35.4 million in adjusted net income, up from $19 million in the fourth quarter) and a bulked-up revenue-earning asset base of $7.6 billion.
The company gave no indication of future securitization plans that would build on its outstanding asset-backed note obligations totaling $1.32 billion. But earlier this year in fourth-quarter earnings remarks, Sondey expressed optimism that container demand appears to be in the early stages of a significant revival.
“These very large shipping lines, many of which now operate several million TEU containers in their fleet, they need very large suppliers,” he told equity analysts. “The major shipping lines don't want to have to go to four of five leasing companies to put together any particular container requirement they might have.
"And I think that's one reason why, since our merger we've actually seen our deal share increase just because we can deliver very big solutions to these guys.”
Triton has issued two deals, one for each of the legacy container firms from which it was created in a July 2016 merger. Triton is manager of the first ship container ABS deal in 2017, the $281 million TAL Advantage VI portfolio offering in March backed by 86,750 containers with a book value of $355 million. Most recently, the company sponsored the $318.9 million Triton Container Finance VI LLC (Series 2017-1) transaction featuring more than 97,000 containers valued at more than $376 million – with many of them newer additions to the fleet with an average age of 1.7 years.