Dell boosts large-client concentration in $1.1B equipment ABS

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Dell Financial Services is serving up a high concentration of larger corporate clients on shorter-term – and relatively low-balance contracts – in its latest securitization for computer and software equipment leasing.

The inclusion of more stable, bigger firms with lesser obligations, as compared to other recent ABS deals sponsored by DFS, is one way the Dell Inc. unit is mitigating the added risks of marketing asset-backed bonds amid the global economic uncertainty from the coronavirus outbreak.

The $1.1 billion Dell Equipment Finance Trust 2020-1, via Barclays, is the largest deal issued by DFS’ trust since 2014 in terms of notional value and number of contracts (15,794), according to presale reports from Fitch Ratings and Moody’s Investors Service.

But it also has the smallest average principal discount balance ($72,929) since 2016 of the pooled lease and loan contracts from 6,232 obligors, and the weighted-average seasoning of 9.8 months is the longest since 2015. (A pool with higher seasoning is likely to experience lower CNL than an unseasoned pool, as a portion of losses have occurred prior to securitization.)

Most notably, the 2020-1 transaction increases the level of large-enterprise clients to 82% of the pool balance, compared to 70% in the trust’s previous offering in October 2019. That shift, along with the “corresponding decrease in exposure to the Medium and Small business segments, to 17.7% from 29.8%,” have provided DFS with an “improved pool mix” in terms of risk and credit quality, according to Moody’s.

Larger firms will likely be better capitalized to continue paying on lease- and loan contracts for computer equipment, software and services (including enterprise cloud service and storage offerings through Dell’s EMC and VMWare product lines).

But the shift did not fully accommodate the growing risks stemming from the economic macro-shock of business closures and curtailed corporate spending as a result of the worldwide COVID-19 pandemic, according to the reports. The expected near-term disruption resulting in “sharp economic contractions” will stress high-leverage and smaller companies in DFS’ client base.

Both Moody’s and Fitch also took into account DFS’ exposure to vulnerable industries such as automobiles, energy, oil and gas and gaming/leisure – which played a role in both agencies assuming slightly higher expected net losses for the DFST 2020-1 transaction compared to DFST 2019-2. Fitch’s expected loss is 1.75%, an increase from 1.5%, while Moody’s raised its cumulative net loss projection to 2.25% from 2% in the prior deal.

Both agencies assigned preliminary triple-A ratings to two senior-note term tranches: a Class A-2 offering totaling $432 million, and a Class A-3 tranche of $188.65 million in notes. A Class A-1 money-market tranche atop the capital stack has each agency’s highest short-term rating: F1+ from Fitch, P-1 from Moody’s.

All the senior notes benefit from 14.3% credit enhancement, which also was a slight notch above the CE of DFS’ previous deal at 14%.

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