As anticipated, issuance in the equipment sector is significantly ahead of last year's pace, with close to $9 billion so far in 2003, including truck and equipment wholesale financing. At about $7 billion, small-, mid-ticket and A&G sectors combined have already met the $6.9 billion seen for all of 2002, and there's still a quarter to go.
In fact, fourth quarter is typically a strong volume period for equipment, as it hit $2.5 billion in 2002. Sources anticipate a few of the staple, repeat issuers to close second- or third-round deals before year's end, including IKON Office Solutions, HPSC Inc., The CIT Group, or CNH Global (with its more typical collateral, versus wholesale). Frontier Leasing and Sky Financial, both of which have been present in past years, have yet to show in 2003, though it is understood that Sky recently closed a conduit facility.
That said, it's safe to say that DVI Inc. will not be part of the fourth quarter activity, as its post-bankruptcy liquidation moves ahead. In past years, DVI was generally good for about $500 million, every other quarter or so.
Last month, five transactions priced for about $2.5 billion via CIT and GE Capital, Great America Leasing and a pair of dealer floorplan deals from CNH.
A first-time player in several sectors this year, GE is basically resetting the benchmark in every market it touches. Its first equipment term deal (not including aircraft), which priced the day after CIT, came four basis points under Libor for its money market class (one basis point inside of CIT). GE's two-year triple-As priced at nine over one-month Libor, seven points inside of CIT's 2.12-year class, and about five basis points behind two-year floating-rate prime auto.
"The spread differential between equipment and auto is not usually that tight," said John McElravey, researcher at Banc One Capital Markets. "The [big difference] with the equipment sector is that there's significantly less transparency than in auto deals."
DVI disease contained
McElravey noted that spreads in equipment ABS have generally moved in over the past several weeks. Apparently, the failure of DVI had little-to-no impact on the sector, sources said.
"I wouldn't really have expected someone like DVI to impact the benchmark spreads," McElravey said. "Even when they were healthy, they traded behind everyone else."
Equipment transactions are not always comparable to each other, and investors put a lot of faith in the seller's name. GE, for example, priced at a premium because, at least in part, it's viewed as highly unlikely that GE will fold anytime soon.
Still, a downturn or sector-wide problem would be viewed differently, McElravey noted. For example, if the agricultural industry was facing credit problems, names lending to that sector would likely experience a common widening in new issue and secondary levels.