...If Container Lease Rates Keep Going Up
From the 10-K:
"Triton, through its subsidiaries, leases intermodal transportation equipment, primarily maritime containers, and provides maritime container management services through a worldwide network of offices, third-party depots and other facilities. The Company operates through its subsidiaries in both international and U.S. markets. The majority of Triton's business is derived from leasing its containers to shipping line customers through a variety of long-term and short-term contractual lease arrangements. Triton also sells its own containers and containers purchased from third parties and enters into management agreements with third party container owners under which Triton manages the leasing and selling of containers on behalf of the third party owners for a fee."
The business here is very simple. And it has a lot of leverage (read: risk). And it isn't a business you want to hold forever. But this business can do very well if industry conditions are favorable. Titan has no product per say. It borrows money to buy containers and leases them out, hoping to make a spread and net income in the process.
The latest earnings report is very interesting. It is obscured by the bankruptcy of South Korean
Hanjin Shipping:
"Hanjin Shipping Co. Ltd is a South Korean integrated logistics and container transport company.
Prior to its financial demise, Hanjin Shipping was South Korea's largest container line and one of the world's top ten container carriers in terms of capacity. In August 2016, the company applied for receivership."
Let's get to the earnings report:
"Triton reported an Adjusted pre-tax loss of $2.8 million in the third quarter of 2016.
"Despite the ongoing situation with Hanjin, our market environment has continued to improve significantly from the first half of the year. The combination of modest trade growth and limited purchasing of new containers has caused the supply and demand balance for containers to tighten. Lease transaction activity and container lease-out volumes have been strong for the last several months. Our utilization currently stands at 93.3%, which is down slightly from the end of the second quarter, but mainly because almost three percent of our containers are in the process of being recovered from Hanjin. The inventory of new and used containers in Asia is much reduced from earlier in the year, and new container prices have increased recently. While market lease rates remain well below our portfolio average, they have rebounded nicely from the low levels reached earlier in the year and continue to have positive momentum."
Mr. Sondey concluded, "Leasing demand remains strong as we start the fourth quarter, and we have not seen the usual seasonal slowdown in dry container lease-out activity. We expect our utilization to increase during the fourth quarter, and expect that increasing new container prices and the tighter supply and demand balance for containers will lead to higher used container selling prices. We also expect our merger cost savings to increase steadily for the next several quarters. However, it will take time for us to fully recover and redeploy the containers previously on-hire to Hanjin, and we will face a timing gap between the lost revenue on these containers and the expected insurance payments that protect against this lost revenue. We also continue to face ongoing pressure from lease re-pricing.
Overall, we expect our normalized level of profitability to increase from the third to the fourth quarter of 2016."
So there's evidence of a rebound in shipping rates. It is worth being long here, although these rebounds are incredibly difficult to forecast.
One thing to watch and study is the implication of the Hanjin bankruptcy:
"Hanjin Shipping Recovery Effort
Mr. Sondey continued, "The recovery process related to the Hanjin default remains a major operational effort, but we are making good progress. We have gained control or have issued delivery clearances for almost fifty percent of our containers previously on-hire to Hanjin, and we expect the share of recovered containers will increase to be in the range of seventy percent by the end of the year. We expect we will eventually recover the vast majority of our containers, but it will take time to recover the "tail" of containers that are scattered across many locations."
"We believe we are adequately covered under our credit insurance policies for lost containers and container recovery and positioning costs that are in excess of our insurance deductibles. Our credit insurance policies also provide up to six months of protection against lost leasing revenue, which was roughly $3 million per month for all of the containers on-lease to Hanjin. The $29.7 million of Hanjin impacts in the third quarter included a $23.4 million provision for bad debt and $6.3 million in lost revenue, much of which was applied toward our insurance deductibles. We expect the financial impact of the Hanjin default to be lower in future periods. Over the next few quarters, we expect that insurance recoveries will offset most of the costs of the recovery effort, though we will not recognize expected insurance payments related to lost revenue until the payments are received."
Okay, so clearly recovering containers from Hanjin is important and is a risk to their capacity, unrecoverable loss potential. But there are reasons to be positive, so it is worth a position.
The other thing to watch out for when looking at leasing companies is debt. There's about $6.3b worth here. Half is fixed, half is floating (which they have partially swapped out in a fixed for floating swap, plus an interest rate cap). Pretty standard stuff.
"As of September 30, 2016, the Company had $3.3 billion of debt outstanding on facilities with fixed interest rates and $3.1 billion of debt outstanding on facilities with interest rates based on floating rate indices (primarily LIBOR). The Company economically hedges the risks associated with fluctuations in interest rates on a portion of its floating rate borrowings by entering into interest rate swap agreements that convert a portion of its floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. As of September 30, 2016, the Company had interest rate swaps in place with a notional amount of $1.6 billion to fix the floating interest rates on a portion of its floating rate debt obligations."
Now they paid $55MM in interest expense in the quarter. Annualized thats close to $220MM. So around 3.5% of debt. Since much of their borrowing is via securitizations, the borrowing rates are lower (collateralized by the containers themselves).
The business model isn't that different to car rental companies. And the swings can be vicious and unpredictable. It's worth taking a position right here, but being very vigilant. You don't want to overstay your welcome with a company like this. The leverage is huge. But right now, it looks like you want to be involved.
From the 10-K:
"Triton, through its subsidiaries, leases intermodal transportation equipment, primarily maritime containers, and provides maritime container management services through a worldwide network of offices, third-party depots and other facilities. The Company operates through its subsidiaries in both international and U.S. markets. The majority of Triton's business is derived from leasing its containers to shipping line customers through a variety of long-term and short-term contractual lease arrangements. Triton also sells its own containers and containers purchased from third parties and enters into management agreements with third party container owners under which Triton manages the leasing and selling of containers on behalf of the third party owners for a fee."
The business here is very simple. And it has a lot of leverage (read: risk). And it isn't a business you want to hold forever. But this business can do very well if industry conditions are favorable. Titan has no product per say. It borrows money to buy containers and leases them out, hoping to make a spread and net income in the process.
The latest earnings report is very interesting. It is obscured by the bankruptcy of South Korean
Hanjin Shipping:
"Hanjin Shipping Co. Ltd is a South Korean integrated logistics and container transport company.
Prior to its financial demise, Hanjin Shipping was South Korea's largest container line and one of the world's top ten container carriers in terms of capacity. In August 2016, the company applied for receivership."
Let's get to the earnings report:
"Triton reported an Adjusted pre-tax loss of $2.8 million in the third quarter of 2016.
- The Adjusted pre-tax loss in the third quarter excludes $59.6 million in Transaction and other costs (which includes a $4.0 million reclassification of accrued incentive compensation expenses relating to employees transitioning out of the Company from Administrative expenses to Transaction and other costs).
- The Adjusted pre-tax loss in the third quarter includes a $29.7 million negative impact related to the default by Hanjin Shipping, and a $6.8 million net negative impact from the preliminary purchase accounting adjustments.
- Excluding the items mentioned above (except the reclassification), Triton's Adjusted pre-tax income would have been $29.7 million in the third quarter of 2016."
"Despite the ongoing situation with Hanjin, our market environment has continued to improve significantly from the first half of the year. The combination of modest trade growth and limited purchasing of new containers has caused the supply and demand balance for containers to tighten. Lease transaction activity and container lease-out volumes have been strong for the last several months. Our utilization currently stands at 93.3%, which is down slightly from the end of the second quarter, but mainly because almost three percent of our containers are in the process of being recovered from Hanjin. The inventory of new and used containers in Asia is much reduced from earlier in the year, and new container prices have increased recently. While market lease rates remain well below our portfolio average, they have rebounded nicely from the low levels reached earlier in the year and continue to have positive momentum."
Mr. Sondey concluded, "Leasing demand remains strong as we start the fourth quarter, and we have not seen the usual seasonal slowdown in dry container lease-out activity. We expect our utilization to increase during the fourth quarter, and expect that increasing new container prices and the tighter supply and demand balance for containers will lead to higher used container selling prices. We also expect our merger cost savings to increase steadily for the next several quarters. However, it will take time for us to fully recover and redeploy the containers previously on-hire to Hanjin, and we will face a timing gap between the lost revenue on these containers and the expected insurance payments that protect against this lost revenue. We also continue to face ongoing pressure from lease re-pricing.
Overall, we expect our normalized level of profitability to increase from the third to the fourth quarter of 2016."
So there's evidence of a rebound in shipping rates. It is worth being long here, although these rebounds are incredibly difficult to forecast.
One thing to watch and study is the implication of the Hanjin bankruptcy:
"Hanjin Shipping Recovery Effort
Mr. Sondey continued, "The recovery process related to the Hanjin default remains a major operational effort, but we are making good progress. We have gained control or have issued delivery clearances for almost fifty percent of our containers previously on-hire to Hanjin, and we expect the share of recovered containers will increase to be in the range of seventy percent by the end of the year. We expect we will eventually recover the vast majority of our containers, but it will take time to recover the "tail" of containers that are scattered across many locations."
"We believe we are adequately covered under our credit insurance policies for lost containers and container recovery and positioning costs that are in excess of our insurance deductibles. Our credit insurance policies also provide up to six months of protection against lost leasing revenue, which was roughly $3 million per month for all of the containers on-lease to Hanjin. The $29.7 million of Hanjin impacts in the third quarter included a $23.4 million provision for bad debt and $6.3 million in lost revenue, much of which was applied toward our insurance deductibles. We expect the financial impact of the Hanjin default to be lower in future periods. Over the next few quarters, we expect that insurance recoveries will offset most of the costs of the recovery effort, though we will not recognize expected insurance payments related to lost revenue until the payments are received."
Okay, so clearly recovering containers from Hanjin is important and is a risk to their capacity, unrecoverable loss potential. But there are reasons to be positive, so it is worth a position.
The other thing to watch out for when looking at leasing companies is debt. There's about $6.3b worth here. Half is fixed, half is floating (which they have partially swapped out in a fixed for floating swap, plus an interest rate cap). Pretty standard stuff.
"As of September 30, 2016, the Company had $3.3 billion of debt outstanding on facilities with fixed interest rates and $3.1 billion of debt outstanding on facilities with interest rates based on floating rate indices (primarily LIBOR). The Company economically hedges the risks associated with fluctuations in interest rates on a portion of its floating rate borrowings by entering into interest rate swap agreements that convert a portion of its floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. As of September 30, 2016, the Company had interest rate swaps in place with a notional amount of $1.6 billion to fix the floating interest rates on a portion of its floating rate debt obligations."
Now they paid $55MM in interest expense in the quarter. Annualized thats close to $220MM. So around 3.5% of debt. Since much of their borrowing is via securitizations, the borrowing rates are lower (collateralized by the containers themselves).
The business model isn't that different to car rental companies. And the swings can be vicious and unpredictable. It's worth taking a position right here, but being very vigilant. You don't want to overstay your welcome with a company like this. The leverage is huge. But right now, it looks like you want to be involved.
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