By Charles Williams and Adam Tempkin; Edited by Adam Tempkin
Acquisition finance, once fueled strictly by bank loans and high yield bonds, has increasingly involved asset-backed debt as a funding method.
This week’s $250 million shipping container-lease asset-backed transaction from SeaCo Ltd, sold to the market by Deutsche Bank (structuring lead), Bank of America Merrill Lynch, and Wells Fargo, is a prime example of the growing trend.
The offering, which was nearly one year in the making, is linked to the acquisition of a General Electric-affiliated container-lease company, GE SeaCo, that was completed last December. GE SeaCo was a 50-50 joint venture owned by GE Capital and SeaCo Ltd.
The sale was the largest foreign acquisition to date by Hong-Kong based Bravia Capital, a private equity and investment firm. Bravia and its Chinese co-investors paid $1.05 billion in a share acquisition for GE SeaCo, which is the world’s fifth largest intermodal container lessor.
Bravia began bidding on GE SeaCo in mid-2011 with a securitization financing package structured by Deutsche Bank and committed to by Deutsche Bank and ING.
For the closing of the transaction late last year, that financing commitment was syndicated to a global group of 12 banks, meaning that those banks shared in the risk.
This week’s asset-backed transaction, backed by the cashflow from lease payments on a portfolio of shipping containers, is the first so-called term ABS deal reducing and replacing the syndicated securitization financing.
“This transaction almost has the look of a leveraged finance transaction, but it’s a true non-recourse offering repaid by the cashflow of the containers,” said one senior ABS banker.
The offering, titled SeaCo Container 2012-1, marks the first time the issuer has tapped the U.S. ABS market since 2005.
SeaCo owns and manages more than 870,000 20-foot equivalent units, the industry’s standard measure, and now operates as a core business within HNA’s existing logistics and finance operations.
This week’s 2012-1 series was offered in a 144a/Reg S format, rated Single A by S&P and DBRS, and offered a weighted average life of five years.
After pricing guidance was disseminated earlier in the week at a yield in the area 4.25%, final pricing tightened to 4.15%. The coupon was set at 4.11% with a dollar price of US$99.98017.
This coupon represents efficient funding for a container-lease company: For a pricing comparison, the $225 million CLIF V 2012-1 (Seacube Container) ABS transaction, which priced back on June 15th, offered a thicker yield of 4.25%, a coupon of 4.21% and a dollar price of US$99.98761. Issuers always strive to deliver lower yields to investors in order to achieve the most efficient cost of funding.
This week’s SeaCo deal was also increased in size from an initial amount of $200 million due to strong investor demand.
Container-lease ABS may be an attractive investment, even compared to other on-the-run ABS sectors, analysts said. For instance, the 4.15% yield from SeaCo offers generous spread pick-up when compared to a three-year Triple A rated prime auto ABS bond or a seven-year Triple A rated high quality credit card ABS, which offer yields of approximately 0.7% and 1.5%, respectively, investors said.
Approximately 20 investor accounts were heard to be included in the book order for the SeaCo transaction, and the deal was roughly two times oversubscribed.
Back in 2011, it was common for only 10-12 accounts to take part in a similar transaction, according to securitization specialists.
The investors involved in the SeaCo offering were said to be those with a stable presence in the ABS market. Looking ahead, SeaCo does not plan to wait another seven years for its next new offering, but it likely won’t occur until at least 2013, according to sources close to the transaction.
GROWING SECTOR, WITH RISKS
Although auto loan-backed ABS are currently the main driver of the securitization market in the U.S., so-called esoteric asset classes, or those that derive cashflows from unusual sources, are continuing to make a comeback this year.
One of those sources is intermodal container leases. After a three-year lull in the container lease ABS market, 2010 saw the first post-crisis ABS issuance; 2011 followed up with six new ABS transactions — the most ever in terms of number of offerings (six deals totaling $1.49 billion, according to Fitch).
This year is poised to outpace 2011, with $1.9 billion in container lease ABS already issued, year-to-date.
Intermodal containers are standardized steel boxes that have streamlined efficiency in transporting products worldwide over the past 50 years. Goods remain packaged in the same container throughout the shipping process, reducing loading and unloading time, and allowing more efficient and secure transport.
The collateral in the SeaCo deal included 46,317 units with over $237 million in net book value (NBV). Dry and refrigerated containers, combined, accounted for more than 83% of the aggregate NBV of the collateral pool. Tank containers represented 13% of the aggregate NBV, with dry freight special containers comprising the remainder, according to DBRS. Overall, the collateral for the notes included 12 different container types.
While transaction performance for these types of deals has been steady, the high cyclicality of the container industry calls for close scrutiny of transaction mechanics, particularly the level of credit enhancement, or the cashflow buffer protecting the most senior bonds, Fitch said earlier this year.
Moreover, elevated container utilization rates across the industry create an incentive for lessors to increase container production. Given the low barriers to container production, overproduction is possible. Container oversupply would apply downward pressure on utilization rates, lease rates, and asset values, Fitch said.
Prices of containers have fluctuated over time and are highly dependent on the price of steel, which makes up the largest component of container pricing.
Container lessors own and manage containers globally, leasing their fleets to shippers and other trade operators. Customers of the lessors are generally global shippers.
Container ABS transactions have been issued since the 1990s. Current outstanding bonds total roughly $3.4 billion and date back to 2004 issuance, as transactions typically follow a 10-year, straight-line amortization schedule.