For its second round of securitization fundraising this year the Dell Equipment Finance Trust is planning to issue about $952.1 million in notes, in a deal financing a significantly smaller number of small-ticket equipment contracts compared with its previous deal.
The last time that Dell Equipment Finance Trust sold asset-backed securities bonds to investors, some 10,704 contracts were in the collateral pool. The current number of contracts is about 36% of that, with revenue from 3,857 contracts securing the notes, according to Moody's Investors Service, which will assign ratings to the notes.
Dell Financial Services, a subsidiary of Dell Inc., finances the fixed-rate operating leases, finance leases and loans on business critical equipment and is sponsoring the deal, according to Moody's. Virtually the entire discounted receivables balance, or 94.6%, consists of contracts to obligors that are large enterprises or public institutions. Moody's regards this as a high watermark for recent transactions, because both of those segments of borrowers have incurred low losses, historically.
The types of obligors in the pool is just one of its credit strengths. Another is that the contracts have low remaining payment repayment terms—36 months or less. Moody's reasoned that this should allow for obligors to completely pay down their loans or leases quickly, and reduce the risk of losses or even defaults.
RBC Capital Markets is managing the DEFT 2023-2, which is slated to close on June 22, according to theAsset Securitization Report's deal database.
The transaction structure is strong, with overcollateralization of 5.90% of the initial pool balance. DEFT 2023-2 also benefits from a non-declining reserve account of 1.00% of the initial pool balance. The six-tranche deal also has subordination built in, with levels of 6.75%, 5.70% and 3.45% subordination for classes A, B and C, respectively, Moody's said.
DEFT 2023-2 does face a number of credit challenges, though, including residual value risk. Residual values of the leased equipment represent about 4.8% of the pool. When residual values are included in securitized portfolios, that inclusion increases performance volatility because it exposes the issuer to the market value of the equipment, Moody's said.
In another potential credit risk, the top 10 obligors make up 30.5% of the original pool balance. Even that risk is mitigated, because the top obligors have a relatively strong credit profile. For instance, seven out of the top 10 obligors have investment grade ratings.
Moody's intends to assign ratings of 'P-1' to the class A-1 notes; 'Aaa' to classes A-2 and A-3 notes; 'Aa1' and 'Aa2' on classes B and C, respectively; and 'A2' on the class D notes.
The class A-1 notes have a legal final maturity of June 24, 2024, while the A-2 through class C notes mature on Jan. 22, 2029; and the class D notes mature on July 23, 2029.
