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Cloud service contracts (again) dominate Dell's $991.8M equipment ABS

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Dell Financial Services continues to securitize pools of equipment leases with high concentrations of contracts with larger corporations, governments and institutions.

These contracts with Dell EMC Infrastructure Group, the cloud storage group created by Dell’s $67 billion merger with EMC Corp. in 2016, account for nearly 77% of the collateral in its next deal, the $991.8 million Dell Equipment Finance Trust 2018-2.

That's down only slightly from 78.1% in DFS’ previous equipment finance deal, DEFT 2017-2, completed last October, but still greater than the 59.1% concentration in its prior deal, DEFT 2016-1.

The 2016 deal did not include Dell EMC accounts. The large-scale contracts in the 2016-1 transaction were through the public and large enterprise division of DFS, for the leasing of primarily Dell-branded technology equipment.

Small and midsize equipment lessors, which traditionally have higher default levels, have shrunk from 41.1% of Dell’s pools two years ago to just 23.2% in the new transaction, which is being arranged by Barclays.

The growth in large obligors has produced a more top-heavy mix of lessors, with an all-time- high top 20 obligor concentration of 33.9%, up from 30% in the $996.6 million DEFT 2071 deal.

Large institutions historically represent the second-lowest loss levels among four client segments serviced by DFS. Fitch notes that DFS' securitizations already experience low net losses, and set a 1.4% net loss proxy to the transaction. S&P has an expected net loss range of 1.6%-1.8%, slightly lower than the 2017-2 projection.

Three classes of senior notes totaling $879.3 million will be issued, a money market tranche and two term tranches with preliminary triple-A ratings from S&P Global Ratings and Fitch Ratings (the money market tranche included in the senior portion of the stack are rated F1+ by Fitch and A-1+ by S&P). All are supported by 15.6% credit enhancement, which is down slightly from 16% for the senior tranches of DEFT 2017-2 due to lower subordination.

There are also three subordinate tranches: $40.2 million of double-A-rated Class B notes, $28.9 million in Class C notes carrying single-A ratings; and a triple-B, Class D tranche sized at $43.3 million.

The notes are supported by 12,107 contracts with a discounted balance of $1.03 billion, or $85,066 per contract. The weighted average original term is 41.3 months, with seasoning of 6.8 months.

The transaction is the third overall since Dell’s merger with EMC, and the seventh by DFS. Proceeds will be for general corporate purposes, according to presale reports.

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