To buy or lease?
With competing needs for capital, liner carriers are using more leased containers.
By Chris Dupin
To buy or lease? It’s a question faced not only by new car shoppers, but liner shipping companies when deciding how to obtain new containers.
In recent years, with many carriers recording losses and needing capital for other parts of their businesses, some are relying more heavily on leased boxes.
“Freight rates have been pressured most of the last three or four years by excess vessel capacity. That, combined with high fuel prices, is squeezing profitability margins” for carriers, said Brian Sondey, chief executive officer of TAL, the third largest container leasing company.
“We certainly have benefitted for the last few years by the stress our customers are under,” he said.
Container shipping is undoubtedly a capital intensive business, and carriers have competing demands for investing in vessels, terminals, information technology, and other infrastructure, said Philip K. Brewer, president and CEO of Textainer, the largest container lessor in the industry. With volumes weak and freight rates under pressure “leasing may make sense in an environment where capital must – whether scarce or not – be rationed.”
Sondey said in addition there are operational benefits to leasing that can help carriers balance trade flows and uncertainty.
In the past, shipping companies have usually had good access to capital, often at lower costs than leasing companies could obtain. But over the past three years, this has changed for some liner companies, giving the leasing companies an advantage.
The “KG” limited partnerships in Germany, which were once an important source of funds for the construction of ships, were also used to fund many container purchases.
While publicly traded container companies have performed well in recent years, the downturn in the liner trade and other shipping sectors has cooled interest in KG investments. Loli Wu, a managing director at Bank of America, noted in a presentation at Marine Money this fall that KG owners have reduced their activity from over $7 billion in 2007 to less than $1 billion in 2011.
At the same time, borrowing from some European banks has gotten more expensive because their own capital costs have gone up and some traditional shipping lenders have reduced their exposure to the sector.
Cost of capital at container leasing companies has become more competitive and Wu said various lessors were able to raise about $2.5 billion through the sale of asset-backed securities in 23 deals between June 2010 and June 2013.
Sondey said while some carriers don’t have as much access to capital, for leasing companies “our access is better than ever. That’s pushed the needle to leasing.”
Operational advantages of new ships, such as fuel efficiency, are likely to keep shipping lines ordering new vessels, he said, “despite the fact that total capacity is not needed, because the unit economics are compelling, and that is going to keep pressure on freight rates for a while, which will probably mean container leasing will be at higher than historical market share.”
Jonathan Harrison, principal of Harrison Consulting in London, said until 2008 shipping lines on average purchased about 65 percent of new dry freight boxes. Since 2009, they have bought about 45 percent, so both carriers and lessors now each own about half of the dry boxes. He said carriers own a higher percentage of refrigerated boxes — about 62 percent, down from 73 percent in 2008.
Textainer, relying on similar numbers from Containerization International and Drewry, reported a similar trend, saying in 2012 lessors purchased 65 percent of all boxes and the liner carriers and others about 35 percent.
Harrison also cautioned these sorts of statistics can waiver by several percentage points — “not because anybody is covering anything up, but because quite often it is not even apparent to the people who’ve got the containers in the system whether they own or lease them.
“If a container is on an eight-year lease and with a fair market purchase option, who does it belong to? If the shipping line thinks he is ‘in the money’ if he buys it, he thinks he owns it, and if he thinks he’s going to redeliver it, then he classifies it as a lease. And that can change from year to year simply by where the market price on the container is. So there is a legitimate gray area,” he explained.
Harrison noted there’s a big variation in what percentage of containers individual carriers choose to own.
For example, he figures Maersk and Hamburg-Süd own about 90 percent of their dry containers and United Arab Shipping is close behind; APL and Hanjin each own about half their container fleets, CMA CGM about a quarter, COSCO about 8 percent, and CSAV almost none.
Each company has a different reason for how it approaches the buy/lease decision. When CMA CGM had a need to raise cash several years ago, it did container sale-leaseback deals, Harrison said. COSCO obtains many of its containers through a sister company, Florens, which is the fourth largest container lessor in the world. CSAV has traditionally chosen to lease equipment, and indeed, when it underwent a huge expansion several years ago, relied much more heavily on chartered ships than many carriers. (Now, CSAV is taking steps to increase the portion of its owned containership fleet.)
Similarly, Harrison said OOCL, Yang Ming and Maersk own all, or almost all, of their reefer equipment, while Chiquita and CSAV own less than 10 percent and CMA CGM about 30 percent.
The decision to own or lease depends on the cost of capital, but also business philosophy, said Victor Garcia, president and CEO of container leasing company CAI International. “Some companies want to own more, while others view leasing as more cost effective because of the flexibility it provides,” he said.
“We give them various locations to be able to drop off equipment and they don’t have to own all the equipment,” Garcia said. “If they are downsizing certain trading lanes they have all this equipment that they still need to find homes for. We give them the ability to right-size their container needs for whatever their trade patterns are.”
Despite the huge amount of new container shipping capacity coming off the waves in the next few years, container executives expect little trouble with manufacturers producing enough tonnage.
Alphaliner, for example, said as of June 1 there were 539 ships with 3.8 million TEUs of container slots on order through the end of 2015.
Typically carriers need about 1.7 to 1.8 containers for each slot, though Harrison said some carriers — Maersk, for example — have a lower ratio.
Brewer of Textainer said container manufacturers have been building about 2.5 million to 2.7 million TEUs per year,
There are only a handful of major container manufacturers, most with factories in China, Harrison said. They include the COSCO Group unit China International Marine Containers, which made about 1.2 million TEUs of dry boxes last year; Singmas Container Holdings, which produced about 540,000 TEUs; Changzhou Xinhuachang International Containers (CXIC), which manufactured about 330,000 TEUs; Maersk Container Industry, which made about 220,000 TEUs; and Dong Fang, which constructed about 180,000 TEUs.
Brewer said those firms could ramp up production to 4 million TEUs, and possibly 5 million TEUs, if demand warrants. “So whether these new vessels portend a shortage of containers, I doubt it,” he said.
The price of containers has increased. Brewer said they cost about $2,100 to $2,200 apiece currently, which compares to $1,500 each in 2001. That might push some to leasing, but prices have been higher, as much as $2,800 to $3,000 per TEU in 2010, according to various reports. “So maybe $2,100 isn’t viewed as being too expensive,” Brewer said.
Wu of Bank of America said container lessors have performed well in recent years compared to other sectors of the shipping business and pointed to two key factors as to why that has been the case.
One is the short asset purchase lead time when compared, say, to a new ship order. A shipping line or lessor can place an order for boxes three months before delivery, while a carrier ordering a ship must do so several years in advance — a difficult task in today’s volatile liner industry. As a result, Wu said the container leasing “rarely gets oversupplied and there’s rarely much speculation.”
He also noted CIMC and Singmas dominate the box manufacturing business. “These guys like to make money; they’re interested in profit margins. They price their boxes appropriately,” Wu said.
He also said eight companies have more than 80 percent of the container leasing market, “so it’s a consolidated industry, which I think is one of the reasons the business performs as well as it does – people behave rationally in this business,” Wu said.
Instead of overbuilding, the major public container lessors have taken steps to consolidate and diversify. Textainer, for example, has purchased six companies since 1998 (including two in 2009), adding 1.4 million TEUs. It has also increased its owned fleet much more quickly than the boxes it manages. The company’s owned fleet has increased by 288 percent since 2003, while its managed fleet is 45 percent.
TAL purchased $350 million in new and sale leaseback containers in the first quarter for delivery in 2013.
CAI has expanded into railcar leasing and, like at Textainer, has grown its owned fleet as opposed to boxes it manages for other companies. In 2005, it had a fleet of 597,749 TEUs, only 24 percent of which was owned. Today, CAI has about 1.1 million TEUs, 72 percent of which are owned.
Wu believes the container leasing industry is undervalued by the equity markets, and this is one reason why a number of outside investors have acquired companies in the sector: the Ontario Teachers’ Pension Plan purchased Seacube in January 2013, HNA/Bravia Capital acquired GESeaco in August 2011, Vestar Capital/Warburg Pincus bought Triton in February 2011, and Kelso purchased Cronos in July 2010.
Sondey said container leasing is a complicated business. His company, for example, has personnel in about 15 countries and allows customers to pick up and drop off boxes across about 50 countries. He said initial leases go for five or seven years, but that’s only a third to a half of the time a container is in service, so the equipment has to be leased again several times over the course of its life. And then the containers have to be sold at the end of their lifetime to other parties that deploy them as storage units, offices, or for other uses. The details of finding those second, third and fourth customers can “make or break your success in this business,” Sondey said.
He said the container leasing business could probably benefit from further consolidation, adding there’s a lot of cost saving to be had. However, he said private equity firms have valued businesses more highly than the existing leasing companies value the cost savings.
“We look at it as a portfolio acquisition and they look at is as a business acquisition,” Sondey said.