Very recent signs of stabilization in the agricultural industry are already apparent in CNH Industrial Capital’s first farm equipment loan securitization of 2018.
According to presale reports on the $774.8 million transaction, demand is picking up for new tractors, harvesters and tillers at a pace allowing CNH to boost the share of new equipment in the collateral pool.
New farming equipment represents 44.8% of the collateral for CNH Equipment Trust 2018-A, which is the highest level since the 47.25% share in the third transaction from the platform in 2015 (2015-C). Including used equipment, the exposure to agricultural equipment is 90%; the remainder of the collateral is construction equipment.
CNH, a longtime issuer in the securitization market with 62 prior deals, has also seen delinquencies in its $5.5 billion managed portfolio start to decline after a recent spike.
“Commodity prices remain low and are anticipated to remain at levels lower than in the prior three years, which is expected to continue to suppress farm income,” Fitch Ratings stated in its presale report. “However, 2018 is showing signs of stabilization with farm income projecting to be consistent with 2017 and CNH Industrial Capital-managed portfolio performance through first-quarter 2018 improving over 2017 levels.”
Both Fitch and S&P Global Ratings expect to assign triple-A ratings to three tranches of term Class A notes totaling $584.4 million. The agencies also rated a $173 million money-market tranche in the transaction (A-1+ by S&P, F1+ by Fitch) and an eight-year, Class B tranche totaling $17.4 million (AA-, A+).
Initial credit enhancement of 4.5% is unchanged from recent CNH-sponsored transactions.
The loans are originated by CNH Industrial Capital and serviced in-house by an indirect CNH subsidiary, New Holland Credit Co.
The collateral pool consists of 3,253 loan contracts with an average balance of $63,816 (or an aggregate $845.8 million), with weighted average original terms of 62.1 months with seasoning of seven months.
While the equipment loan obligors in the construction industry, 90% of the contracts are agricultural-based.
Which is why since 2015, the decline in farming income from falling commodity prices has led to slight increases in late pays: a 0.47% delinquency rate in 2013 had increased to 1.15% in 2016 and 2.18% by year-end 2017. While the first-quarter had delinquencies of 1.31%, that was down seasonally from the 1.34% level in the first quarter of 2017. Delinquency rates remain far below CNH's high-water mark of 3.95% in 2009.
While new equipment sales are considered a boost to collateral credit quality, the "higher loss pace of recent vintages" has pushed Fitch to slightly increase its base-case loss proxy to 1.2% from 1.15%. S&P is maintaining a net loss range of 1.55%-1.8%.
Nearly 52% of the contracts are for new product to obligors nationwide, but with the top geographic concentration (four of the top five states) in the upper Midwest. The 32.4% concentration mix of the loans from the top five states is up slightly from 29.96% in the CNH 2017-C transaction, and 31.3% from 2017-%, but “within the range” of transactions since 2014, according to Fitch.
Most of the loans are annual-pay contracts (69.5%), a level that has increased from 62.2% in last year’s final deal. About 76% of the pool has contractual payments scheduled annually between January and April.