The recent economic slowdown in China could have negative implications for container ABS transactions, Fitch Ratings says. Container utilization and lease rates in outstanding transactions could come under pressure if China's manufacturing sector continues to decline and the country enters a long-term recessionary environment with slowed GDP growth.

Earlier this week, China's GDP growth decreased to 6.9% in the third quarter, the first time reporting below 7% since 2009. The International Monetary Fund (IMF) also recently lowered global growth forecasts for 2015 from 3.3% to 3.1% as a direct result of China's increasingly stagnant growth, highlighting the importance of China's role in the global economy.

China's importance to shipping is significant. Its ports account for over one-third of the world's containerized traffic, by 24 equivalent units (TEUs), with the majority of traffic traveling on the Asia-Europe and Transpacific trade routes. Hapag-Lloyd AG, one of the largest container shipping companies in the world and consistently one of the largest lessees in container ABS pools, announced its worldwide cargo volumes decreased 3% in the first half of 2015, largely due to exposure to China ports. State-owned China Cosco Holdings (COSCO), China's largest container shipping line, also recently announced declines in cargo volumes and revenue declines of 9%. With global shipping lines already struggling in recent years, China's slowdown could increase lessee default risk.

Despite their fairly diverse collateral pools, lessee concentrations in container ABS transactions are often highly concentrated among a small number of lessees, including Hapag-Lloyd, COSCO and France's CMA CGM.

Fitch expects lease rates to remain near record lows in the interim, generating lower amounts of monthly cash flows for outstanding container ABS transactions. Lease rates for 40- and 20-foot dry containers recently reached all-time record lows, due to oversupply of containers and increased competition in the market. Along with 40-foot reefers, these containers are the most popular types in securitized pools and their lease rates are the primary drivers of cash flow. Additionally, new build prices for containers are at all-time lows, creating pressure on disposition proceeds for the trust.

Fitch believes increasing LTVs, declining monthly cash flows and an increasing probability of lessee default create a higher degree of risk for container ABS should the situation in China worsen.

While many lessors within the market have refinanced older transactions over the past two years, many remain at risk due to the potential for cash flows to decline. If interest rates rise over the next 12 months, the lessors will potentially lose their ability to refinance outstanding debt. In this scenario, Fitch would expect older transaction LTVs to increase further due to the decline in monthly cash flows.
Source: Fitch Ratings