AGCO Finance, a joint venture between AGCO Corp. and De Lage Landen Finance (or DLL), a unit of Rabobank, is marketing its debut offering of $896.55 million of bonds backed by equipment loans and leases, according to Moody’s Investors Service.
Like a transaction completed last year by DLL itself, this one is notable for its exposure to residual value risk, which increases the potential volatility of the pool’s performance, since losses could arise if the leased asset is turned in and sold for less than expected. Residual value receipts on lease contracts will represent around 7.4% of the securitized pool balance. (That compares with 12% for DLL’s November 2017 transaction.)
Higher hard credit enhancement relative to agriculture equipment peers considerably mitigates the residual value risk, however, says Moody's.
Unlike DLL’s November 2017 transaction, which was backed entirely by agricultural equipment, this one is backed by a mix of agricultural equipment and construction equipment, though agricultural equipment accounts for roughly two-thirds (66.29%). That mix is similar to recent transactions completed by CNH and John Deere.
The new transaction, DLL 2018-1, will issue four tranches of notes, a money market tranche and three term tranches with preliminary Aaa ratings from Moody’s. All four tranches benefit from 9.55% hard credit enhancement, including overcollateralization and a reserve account.
That’s lower than the 11.3% credit enhancement DLL had to offer on its November 2017 transaction (with the nearly identical moniker of DLL Securitization Trust). But it’s still far more than peers CNH and John Deere offer on transactions backed entirely by loans.
Moody’s cites as a strength the fact that the largest obligor state in DLL 2018-1 represents 6.04% of the total discounted pool balance, with all other states accounting for no more than 6% each.
The rating agency also views the performance of AGCO Finance’s managed assets favorably, noting that delinquencies and net losses of collateral originated by the sponsor have consistently been low since 2012. As of Dec. 31, 2017, the net loss as a percentage of the average managed portfolio balance was 0.35%.
“Transaction performance will benefit from the good credit quality of agricultural equipment loans and leases owing to strong farm balance sheets,” the presale report states. “Farmers’ net cash incomes have recently stabilized following declines from 2014 through 2016. Historically low overall debt burdens and relatively low interest rates will help most agricultural equipment obligors continue to meet their debt obligations.”
However, agriculture equipment transactions retain the inherent concentration risk of exposure to a single industry. Moody’s noted that the profitability of U.S. farms peaked in 2014; since then net incomes have declined, primarily due to a decline in crop prices and to a lesser degree due to higher production.