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'Game of chicken gone bad' causes opportunities, challenges for lessors

Thefinancial services industry faces the potential for "sizeable creditlosses" after the voluntary restructuring efforts of South Korea-basedHanjin Shipping descended into an unprecedented and "poorly managedbankruptcy," an executive of one of the lessors impacted by the company'scollapse said.

, thecontainer lessor formed as a result of the July merger of TAL International Group and TritonContainer International, has implemented an aggressive recovery effort inresponse to Hanjin Shipping's Aug. 31 bankruptcy filing, a development thatChairman and CEO Brian Sondey likened during an investor day to a "game of chicken gonebad."

Sondeysaid Triton knew there was a possibility the world's seventh-largest containershipping line could seek bankruptcy protection, but it had not viewed that asone of the most likely outcomes.

"We'venever seen a major asset-owning shipping line that had a lot of ships … andterminals that they owned go into liquidation," he said.

Tritonofficials cautioned that the financial impact of the Hanjin Shipping bankruptcywould be significant in the near term and serve to mask improvement in thecompany's baseline results. The company's fleet on-hire to Hanjin Shippingincluded 87,010 containers with net book value of $242.7 million. Through Sept.24, Triton had recovered or direct-interchanged 5,400 of those units; anadditional 6,600 units were cleared for redelivery.

CFOJohn Burns said the company will reserve $21 million for accounts receivable inthe third quarter and lose approximately $3 million in monthly revenuebeginning in September as a result of the bankruptcy. Triton maintains creditinsurance that it believes will cover most of the recovery costs. The coverageis worth in excess of $100 million and is subject to $6.5 million indeductibles.

Othercontainer lessors have also discussed the impact of the Hanjin Shippingbankruptcy.

said it leasedapproximately 15,000 containers worth $40 million in the aggregate to theshipping company, representing about 2% of its rental revenue assets. Itoffered a preliminary projection that its exposure to the bankruptcy would belimited to $2.6 million of accounts receivable related to income recognizedprior to the third quarter of 2016 and up to the $2 million deductible on aninsolvency insurance policy.

reported in a Sept. 12 presentation that it could incur "significantcosts" from the bankruptcy related to items such as uncollectiblereceivables and expenses associated with the recovery, repair, repositioningand re-leasing of containers leased to Hanjin Shipping. Those containersrepresented approximately 4.8% of its owned and managed fleet in 20-footequivalent units. The company cautioned that it was unable to quantify thefinancial impact, however.

Tritonclaimed a 26% share of the container leasing market based on fleet size,followed by Textainer at 17%. CAI's 6% share ranked sixth-highest behindFlorens Container Services, SeaCoLtd., and the OntarioTeachers' Pension Plan Board-backed .

Whilethe bankruptcy negatively impacts Triton's bottom line, it could have positiveimplications for leasing demand. Triton said container lease prices had beenunder pressure until recently and that demand for dry container leasing hadbegun to pick up in the second quarter. With Hanjin Shipping's fleetessentially out of service, Triton officials said, demand from the line'scompetitors for dry containers to take up the displaced cargo has increased.

"Webelieve the impacts of the Hanjin bankruptcy will lead to increaseddifferentiation of capital availability and cost among the leasing companies aswell as continued limitations on new container investments," VicePresident of Finance and Investor Relations Andrew Greenberg said. He addedthat lenders have been focusing their capital on "top-tier players"like Triton, while pulling back from some of the smaller lessors.

Tritonraised $925 million of new debt financing on a year-to-date basis, includingthe renewal of a $600 million five-year revolver and the $100 million upsizingof a $650 million ABS warehouse facility, despite a more challengingenvironment in the credit markets in 2016 relative to 2015. The companycontinues to monitor the ABS market for what Greenberg described as "anopportunity to issue and term out some of our bank debt," but he said thecompany is monitoring secondary trading of container ABS as it remains unclearwhether the market has fully absorbed the potential impacts from the HanjinShipping bankruptcy.

Overall,Triton executives said they believe the recovery from the line's collapse willbe expensive and complicated, but manageable.