Fitch Ratings is expected to give stable rating to nearly $940 million in notes Dell Equipment Finance Trust will issue to raise general funding capital.
The transaction, DEFT 2022-2, features $258 million in Class A-1 notes with an expected rating of F1+sf and an expected maturity date of July 24, 2023. It also consists of $366 million in Class A-2/AAAsf with a maturity date of July 22, 2027, and $244.83 million Class A-3/AAAsf with a maturity date of July 22, 2027.
Fitch gave the U.S. transaction’s owner and trustee, Bank Trust, an AA–/F1+rating with stable outlook, and expects to give the collateral and obligor performance a strong credit quality rating.
The transaction will be backed by commercial leases and loans primarily supported by Dell Technologies and Dell EMC branded equipment. Dell Financial Services has underwritten, serviced and sponsored the loans and leases.
Approximately 9% of the asset pool consists of “unperformed services contracts, and long-term trade credit receivables” related to software contracts, according to Joyce Fargas and Steven Stubbs, the Fitch analysts who wrote the report.
All classes benefit from a cash reserve account and overcollateralization.
The total initial hard credit enhancement for class A, B, C and D notes is 12%, 9.5%, 6.75% and 4.75%, respectively. Additionally, all classes benefit from 2.02% annual excess spread.
Based on the “robust historical recovery data for Dell-specific collateral,” recovery credit was applied only to the approximately 62% Dell-specific collateral, but not to EMC-specific collateral, which historically experienced limited instances of defaults, according to the report.
EMC did not remarket any repossessed equipment. “Furthermore, these contracts consist in large part of software and service contracts for which there is no collateral to repossess,” the analysts wrote.
Hard credit enhancement levels for the class A, B, C and D notes of 2022-2 are down compared with historic transactions, according to the analysts. Yet loss coverage is sufficient to withstand the default of the top 10, eight, six and four non-investment-grade obligors that “historically demonstrated low default and loss.”
Since DEFT 2022-2 includes a high concentration of investment-grade obligors, Fitch gave the top-10-rated obligors an A/A– weighted average rating, which is slightly higher than 2022-1 but consistent with other more recent DEFT transactions.
The largest obligor represents 5.3% of DEFT 2022-2, top 10 obligors 26.5% and top 20 obligors 37.8%, which are higher levels compared to 2022-1 but comparable to recent DEFT transactions. Concentration risk, however, “declines significantly with traditional small-ticket equipment ABS transactions,” according to the report.
To fit the unique collateral characteristics of DEFT transactions, Fitch used “a modified obligor concentration approach” as the primary rating driver, instead of the stressed loss approach.
Loss performance in the small and medium business improved from weakness seen in 2020 and 2021. Therefore, public and large institutions segments “have experienced low default rates due to the strong credit profile of these obligors,” the analysts wrote.
All DFS securitizations reported low cumulative net losses. The base case CNL proxy for DEFT 2022-2 is 1.3%.
