Falling container freight rates may pose near-term asset quality and residual value risk to some Chinese leasing companies that have higher exposure to container ships, but the impact should be modest due to their diversified portfolio mixes and strong parental support, says Fitch Ratings.
Container freight rates have dropped significantly in recent months, driven by slowing global trade growth and easing operational disruptions in the shipping supply chain. However, rates remain above the low level prior to 2020. The risk of global recession amid tighter monetary policy and rising inflation could put further pressure on freight rates.
Among our rated Chinese lessors, ICBC Financial Leasing Co., Ltd. (ICBC Leasing, A/Stable), Bank of Communications Financial Leasing Co., Ltd. (Bocom Leasing, A/Stable), China Development Bank Financial Leasing Co., Ltd. (CDB Leasing, A+/Stable), and CSSC (Hong Kong) Shipping Company Limited (CSSC HK Shipping, A/Stable) held the most sizeable ship assets, ranging from USD5 billion to USD16 billion as of end-2021, or around 11% to 33% of their leasing portfolios.
The proportion of ship leasing to the total leasing portfolio increased more significantly for ICBC Leasing on a managed basis, while those for Bocom Leasing and CDB Leasing have increased modestly. This reflects their long-term strategies to expand in ship leasing, while the pandemic hampered growth of their aircraft leasing businesses.
Fitch-rated Chinese financial leasing companies’ ship exposures are well-diversified across various vessels types. Containerships accounted for around 8%-33% of their leased ship assets (or 1%-11% of total leasing portfolios), while the rest include mostly oil vessels, liquid gas vessels, and bulker carriers. We believe the high level of diversification should smooth the effects of business cycles. Some of these rated lessors have a number of vessels under construction to be delivered over the next couple of years. However, they usually place orders with leasing contracts attached to secure steady fleet utilisation rates.
CSSC HK Shipping is the only Fitch-rated Chinese lessor involved exclusively in ship leasing and fleet operation. It is a leasing subsidiary of China Shipbuilding Group Corporation, a state-owned shipbuilding conglomerate, and specialises in providing financing solutions to group clients. Its monoline business model exposes it to the cyclicality of the shipping industry, but its diversified vessel portfolio mitigates the associated risks. The company had strong growth in 2021 on robust deliveries from its order book, but containership exposure remains modest at around 10% of its leasing portfolio at end-2021.
Any impact from declining freight rates on the lessors’ interest and rental income is likely to be minimal because ship-leasing contracts are usually long-term with mostly fixed lease rates. Fitch considers the credit risk as low as most of their lessees are global leaders that have weathered economic cycles. In addition, the lessees’ cash positions have improved in the past two years, bolstering their repayment ability in the current downturn.
Our rated Chinese lessors’ Issuer Default Ratings benefit from the strong support from their parents as they are of strategic importance to and closely integrated with their parents, whose credit profiles benefit from support from the China sovereign (A+/Stable). We do not expect the near-term pressure on container freight rates to affect the parents’ propensity to support the rated lessors, and our perception of strong parental support mitigates the pressures on their standalone creditworthiness. In addition, the lessors’ average leverage declined in recent years as a result of the strengthening regulatory environment, which offers them a modestly higher buffer to absorb potential asset risk.
Source: Hellenic Shipping News
