Balboa Capital Corp. is preparing a $282.91 million of notes backed by leases on small and mid-ticket equipment used by physician offices, trucking companies and restaurants, among others.
The company has increased the level of investor protection on the senior notes, if only slightly, to offset Moody’s Investors Services’ expectations that losses will be slightly higher than a 2016 transaction.
Two senior tranches of notes will be issued in the transaction: a $73.5 million money market tranche that is not rated by Moody’s and a $140.2 million tranche of notes maturing in June 2023 provisionally rated Aa2. Both tranches benefit from total hard credit enhancement of 25.9%.
There will also be four subordinate tranches of notes with ratings ranging from A1 to B2.
Credit Suisse is the lead underwriter.
Balboa provides financing for small- and mid-ticket equipment, including medical equipment (26.3%), trucks (15.5%) and computer software (6.0%) used by commercial obligors in a large variety of industries.
The company targets small to midsize commercial businesses that are not rated and therefore their default probability is unknown. However, this risk Is mitigated by the fact that 75% of the contracts in the pool have a personal guarantee from the obligor, according to Moody’s. The weighted average FICO score of the obligors in the pool is 721.
Moreover, the pool of leases backing this transaction is diverse, as the top five obligors represent less than 1% of the portfolio. The top three obligor industries are medical offices (21.6%), local trucking (5.5%) and nonclassifiable establishments (3.4%).
Nevertheless, Moody’s has increased its expectations for cumulative net losses to each 3.75% over the life of the deal, up from 3.50% for the 2016 transaction in response to higher than anticipated pace of cumulative net losses in Balboa's 2016 transaction, mostly stemming from a lawsuit against America’s MHT, one of Balboa’s vendor partners. Other equipment leasing companies were also affected by the lawsuit, the rating agency notes in the presale report.
Moody’s expect losses in the latest deal to be higher as well, even though there are no MHT contracts included in the pool of collateral. It also expects losses to subside once recoveries flow through to the transaction, specifically on charged-off contracts with personal guarantees because such contracts typically take longer time to resolve claims after they are charged off.
DBRS used an even forecast for cumulative net loss of 4.35% in its cash flow analysis; nevertheless the rating agency assigned its highest rating, AAA, to the senior term tranche of notes to be issued, one notch higher than Moody's equivalent rating. And unlike Moody's, DBRS is rating the money market tranche, provisionally assigning an R-1.
