ARI’s next vehicle fleet lease securitization has higher exposure to weaker borrowers, and Fitch Ratings expects losses on the collateral will be higher as a result.
The majority of 316 obligors in the $591.7 million pool of collateral, 62.75%, are publicly rated, but that is down from 64.61% in the sponsor’s prior deal, completed earlier this year. Moreover, the percentage of obligors with an investment-grade rating has fallen to 32.28% from 41.90%.
The collateral for the new deal has fewer of the weakest borrowers; those with ratings below B represent just 1.62%, down from 3.84% in the prior deal.
Nevertheless, the overall decrease in quality is “material” in Fitch’s view.
Among other credit considerations, the portfolio remains well diversified, although concentrations have increased slightly from the prior deal. Most notably, the top industry, oil and gas, has increased to 14% from 9.35% in a deal completed earlier this year and 4.68% in the sole transaction completed in 2017.
Fitch notes that ARI’s portfolio has not experienced any asset deterioration related to the oil and gas sector to date; however, it believes that diversification helps mitigate sensitivity to “stressors” in any particular industry.
Geographic concentrations have also increased, with the top five states accounting for 45.37% of the pool, up from 40.72% in the prior deal. However, the top 10 obligors by lease balance are consistent with 2018-A at 29.8% versus 29.86% in the prior deal.
On a positive note, all the leases in the latest deal are open-ended, meaning the lessees bear virtually all of the risk that the vehicles will be worth less than expected at the end of the contract. Therefore, investors are only exposed to risk of a decline in vehicle prices in the event of an obligor default.
Three tranches of notes will be issued in the transaction , $177 million of money market notes provisionally rated F1+ and two AAA-rated term tranches, one for $287 million and one for $70 million, both with a final maturity of August 2027.
J.P. Morgan is the lead underwriter.
The initial hard credit enhancement for the notes has increased to 10.25%, up 1.50 percentage points from 8.75% for previous deal and also up from 9% for the 2017 transaction. Initial enhancement consists of 9.75% overcollateralization and a 0.50% reserve account. Additionally, the transaction benefits from a yield supplement account YSA and annual excess spread, or the difference between interest earned on the collateral and paid out on the notes, of 0.89%.
ARI is the second-largest provider of fleet management services for corporations operating vehicles across North America, based on the number of funded and managed vehicles. The company is headquartered in Mount Laurel, N.J. As of March 31, 2018, the total book value of the vehicles with respect to leases managed by ARI was $3.8 billion.
