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Issuance of container asset-backed securities (ABS) once again reached new heights in 2013, as shown in Exhibit 1, by both number of transactions (12) and dollar balance ($3.2 billion). This represents yet another year of growth following successive improvements in 2011 and 2012. The sector has shown a dramatic resurgence in securitization activity since 2010, fueled by reduced funding from alternative sourcesnamely bank financing-and attractive conditions for ABS issuance. A drop in issuance is likely in 2014, largely due to the amount of transactions completed in the last few years, but the stable performance of these transactions through the last downturn should support issuance for years to come.
Due to the cyclical nature of the container industry (including the volatility of utilization rates, lease rates and asset values), as well as high industry concentrations and manager reliance, container ABS transactions are unlikely to achieve high, investment-grade ratings. Instead, Fitch Ratings believes that these risks can be appropriately addressed to achieve up to "Asf' ratings based on current transaction structures. This article discusses Fitch's considerations in reviewing container securitizations, including an assessment of sectorand transaction-specific risks, as well as an analysis of recent collateral trends that could influence transaction performance. Despite these risks, the ABS issued in the space did continue to perform in a period of great stress to the shipping industry.
ASSESSING THE RISKS IN CONTAINER ABS
Cyclicality
Fitch has observed substantial cyclicality in the industry because containerized traffic is dependent on world GDP growth and trade flows. (See Exhibit 2.) Container demand ebbs and flows with these variables. Revenue for lessors depends on utilization rates, lease rates, and container asset values. All these variables are also affected by the economic environment and, therefore, demonstrate cyclicality. Fitch views these variables as interdependent to a large degree, with each a key risk to container ABS transactions.
Utilization Rates
Cyclicality is highly evident in industry utilization rates on dry containers (which account for the largest share of ABS portfolios), tracking world GDP growth over time. Concentrations in shorter-term and master lease agreement (MLA) leases lead to the most utilization volatility, as leases will not be locked in through reduced demand cycles. Un-utilized containers can also gen- erate incremental costs, like those for storage, further impairing...