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Delinquencies balloon in Element's new $500M fleet lease ABS

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Element Fleet Management (EFM) is planning its third securitization of corporate fleet vehicle leases of the year while coping with sharply rising delinquency rates among its normally highly vetted obligor base.

The Toronto-based lessor is marketing bonds totaling $500 million for Chesapeake Funding II 2017-4, its new securitization of U.S. corporate fleet vehicle leases to nearly 1,000 companies doing business with EFM’s Gelco subsidiary.

The 2017-4 issuance will be similar in structure to previous Chesapeake II transactions in April and July, with a four-tranche notes structure led by a fixed- and floating-rate Class A-1/A-2 series totaling $462.6 million with an 11.25% credit enhancement level in line with those prior deals.

The 2017-4 issuance is heading to the market as EFM, the largest corporate vehicle fleet lessor in North America, deals with a sharply rising 30-plus and 60-plus day delinquencies on the underlying leases in its $8.4 billion managed portfolio.

The 30-day delinquency rate at the mid-point of 2017 increased to 4.52% from 1.72% in June 2016, according to presale reports. The 60-day rate went from 0.69% to 2.04% in the same period.

The company is reportedly blaming “administrative” challenges with both the merger of Element’s two securitization platforms earlier this year, and the servicing integration of the Gelco U.S. fleet business acquired from GE Capital in 2015 in a $6.9 billion deal.

“Despite strong historical performance of Gelco's managed portfolio, the portfolio's delinquency ratio (60 days+) has increased significantly since April 2017,” Moody’s Investors Service wrote in a presale report. “It's too early for us to determine whether these delinquencies are administrative in nature or a credit issue.”

Gelco has a historically low delinquency and loss performance level, due greatly to a clientele base of primarily debt-rated firms – including nearly 52% in the latest pool carrying investment-grade ratings. Thirty-day delinquencies have ranged between 1.23% and 2.21%; 60-days between 0.63% and 0.85%.

Fitch Ratings indicated it had few concerns about the sharp rise. “Administrative delinquencies such as these are common in commercial fleet lease portfolios and render delinquency levels a weaker indicator of defaults than in retail finance portfolios,” the agency wrote. “This is reinforced by Gelco’s continued strong credit loss experience, which has remained low during this period.”

Fitch, Moody’s, Kroll Bond Rating Agency and bond rating agency DBRS each assigned preliminary triple-A ratings to the senior notes despite the potential credit deterioration.

The collateral pool consists of 279,248 leases (seasoned 19 months) to 956 corporations with an average lease balance of $20,42. The aggregate vehicle value in the pooled fleet $5.7 billion.

Nearly 64% of the pool is comprised of leases for light-duty trucks, and 14.5% to passenger vehicles. Medium- and heavy-duty trucks make up over 16% of the collateral.

The vehicle fleet leases are entirely originated by Gelco. They are also almost entirely open-ended leases, according to presale reports, in which the lessees bear the residual risk of a truck or car’s resale value at the end of the average five-year lease term (the trust would only be exposed to potential residual losses in the event of a default).

However, with its master trust structure, Chesapeake II has an eight-month revolving period in which it may add some closed-end leases. The trust’s residual exposure will be limited to 7.5%.

The open-ended fleet leases are a beneficial credit element to the trust, as is

The diverse pool has only a 14.2% exposure to the top five obligors.

EFM earlier this month received its initial issuer rating from Fitch at an investment-grade (BBB+) level, complementing its recently affirmed A- rating from KBRA and BBB (high) from bond rating agency DBRS. The firm is noted rated by Moody’s.

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