Container Leases Benefit from Structural Improvements
August 1, 2013
Ratings of shipping container lease securitizations are closely tethered to those of their sponsors, and this once kept them in the triple-B range, before insurance. But recent transactions have garnered ratings as high as ‘A’, and analysts expect they could go even higher.
Container leases have always been trickier to securitize than leases on other kinds of equipment, such as railcars or aircraft. That’s because the leases tend to be short term: shipping companies own the bulk of their fleets, relying on leases of three to five years to manage fluctuations in demand to move goods around the world. However, term securitizations are typically structured with a 10-year expected maturity. This mistmatch means investors have to rely on managers of these deals to re-market containers that come off lease in order to generate cash flows to repay the notes.
Re-marketing isn’t the only unusual risk in container lease securitizations, however: investors also have to rely on managers to keep track of where the containers end up. In some cases, they must move the containers to locations where they will be more useful.
Because of this, “the manager fee is significantly greater than [in] the financial asset securitizations,” said Antony Nocera, senior director covering commercial and non-traditional ABS at Kroll Bond Rating Agency.
The upshot is that the rating of a container lease securitization is much more closely tied to the corporate credit rating of the lessor and manager than other kinds of securitizations, where servicers’ primary job is to collect payments and distribute the funds to noteholders.
Container leasing companies began issuing securitizations on a regular basis in 2001. Between 2001 and 2007, there were 11 issuances, all of which benefited from a financial guarantee from a bond insurer, according to Kroll. These deals were initially rated ‘AAA’ because of the financial guarantee but had underlying ratings in the ‘BBB’ range.
During the Great Recession there were no new deals issued due to poor capital market conditions including an inactive bond insurance market. This wasn’t a problem for container lessors, since they didn’t need to expand their fleets during this period.
When the economy started picking up in 2010, container lessors began growing their fleets to meet increased demand. Several companies reentered the securitization market to finance this expansion. Without the benefit of financial guaranties to enhance the transaction’s rating, eight new transactions were completed in 2010 and 2011 and received ratings in the ‘A’ category.
What changed? The container leasing sector now has had greater cashflow stability because the terms of leases have lengthened and shipping companies now have more responsibility for returning containers that come off lease. This reduces investors’ reliance on the manager.
Also, most of the securitizations completed before the financial crisis performed well through the recession. The deals withstood the stressful economic environment and paid all monthly interest and scheduled principal payments, providing evidence of the sector’s ability to withstand economic stress and volatility in international trade. This performance data gives rating agencies, and investors, more confidence in the asset class.
While noting that some companies are reluctant to share data, analysts at both DBRS and Kroll said that container securitization issuers have been transferring management more and more frequently, and have gotten pretty efficient at it.
“It’s a long-lived asset. You will have a few life cycles throughout the useful life of a container, meaning that it can be leased and re-leased several times and then leased again for under the long- and short-term agreements until it gets old,” said Sergey Moiseenko, senior vice president in the U.S. & European structured finance division at DBRS.
“What we see is structural improvements like manager transition accounts and managers transfer and manager trustee. There also exists strong empirical evidence of people taking over other people’s portfolios and integrating them successfully,” Moiseenko said during a telephone interview.
Nocera said that companies have cut the time it takes to transfer mangers and that this process is generally low cost. “Based on feedback from container issuers, it takes 30 to 90 days and the cost should be somewhat minimal,” he said.
He added that, while most container ABS deals don’t feature a back-up or replacement manager in place at the time of issuance, “hiring a replacement manager can be accomplished in a very short period of time and the transition should not be disruptive to the securitization.”
Another Kroll analyst, Brian Ford, associate director in the structure finance team, cited Textainer as a company that has successfully taken over management in the past.