German financial analysts are concerned about the financial health of container owner P&R Group, which controls a fleet of 1.2M TEU.
Concerns over the sustainability of P&R’s business model have risen after the container owner withdrew two of its standard offers to investors to “purchase” containers on lease and buy back arrangements this week.
P&R offers investors the opportunity to purchase containers that are under contract to container leasing companies. Investors buy the container at a fixed price with a fixed lease rate for a three or five year term, and P&R undertakes to buy the box back at an agreed percentage of its value at the end of the contract.
According to its website, P&R manages some 1.2M TEU for over 50,000 investors, and it has been in the business since 1975. A recent offer prospectus from P&R notes that although the company undertakes to repurchase containers at 65% of their agreed value, this is not secured under the contract. P&R, however, claims a 100% track record in meeting its commitments, and the company’s mission statement - “What you sign is what you get” - underlines its philosophy.
Raising funds to purchase containers from individual investors in this manner had its heyday in the 2000s, before the global financial crisis, and is much less common today. P&R, however, has stuck with the model.
What is causing the analysts so much concern now, however, are recent disclosures around P&R’s offers and its assets. From 2017 German law has required a prospectus for this type of offering, and analysts are taking a much closer look at the company.
One organisation, Investmentcheck, said that between 2014 and 2016 P&R’s leasing model was underfunded by over €170M. It expressed concern over the degree to which P&R was able to meet obligations to investors on the assets they had purchased from its operating revenues, rather than relying on “new business” to pay existing investors. In a June 2017 report Investmentcheck said “Apparently, the returned containers from previous investments are being sold to investors again”, without it being made clear to new investors they were purchasing used containers.
When P&R withdrew two of its offers from the market without any explanation this month analyst sentiment hardened and speculation is mounting that the company is in financial trouble. In particular there is significant concern that P&R has €1 billion worth of containers on five-year deals it booked in 2013 returning this year, which need to be resold for €650M, Investmentcheck stated. It went as far as to question whether P&R’s business model was, “despite being 42 years old, a form of pyramid scheme?”
Not helping P&R is a current climate where German investors are weary of shipping containerisation as a sector. German banks lost heavily on shipping loans last year, and container owner Magellan went into liquidation owing its investors around €350M. Only around €160M was recovered when Magellan’s 182,000 TEU fleet was sold to Buss Capital and placed in the Textainer leasing fleet in August 2017.
P&R also faces market headwinds; its business model is better suited to a market where prices and rates are more stable. Over the last five years container demand, daily lease rates, and new and used container prices have fluctuated wildly. Furthermore, the leasing industry is far more leaner and consolidated today, with less room for the ’middleman’ role of a managed fleet owner. This is reflected in the ownership profile of leasing industry fleets; today the percentage of the total lease fleet that is managed under arrangements like the P&R model (as opposed to owned by leasing companies themselves) has fallen to under 10%, most of which is placed with Textainer, and then smaller leasing companies including Blue Sky, UES and Touax.