Toronto-based Element Fleet Management is issuing its sixth term-note offering through its Chesapeake Funding II trust by marketing $650 million in new bonds backed by corporate auto and truck fleet leasing and management contracts.
Chesapeake Funding II LLC Series 2018-1's collateral is made up of 293,919 leases with an average balance of $20,358 on 62-month terms. The aggregate value of the leases is nearly $6 billion. More than 65% of the collateral involves light-duty trucks, with more than 24% for medium- and heavy-duty trucks and 13.21% for autos.
The trust plans to issue $601.4 million in Class A-1/A-2 fixed- and floating-rate class notes, each tranche carrying triple-A ratings from Moody’s Investors Service, DBRS and Fitch Ratings.
The Class A-1/A-2 notes benefit from 11.25% credit enhancement, which includes 7.25% subordination, 3% overcollateralization and a 1% initial cash reserve.
The company’s previous securitization was in October, in a $500 million notes issuance.
Element is the largest vehicle fleet management firm in the U.S. and Canada after its $6.9 billion acquisition of the U.S.-based fleet operations of GE Capital in 2015 and its 2014 purchase of the Canadian and U.S. fleet business of PHH. It is publicly traded under the EFN symbol on the Toronto Stock Exchange.
Element's managed portfolio, like those of other corporate fleet lessors, has had low historical losses from businesses that typically prioritize fleet payments over other debt to keep operating vehicles central to their business. ECF also primarily offers open-end leases in which lessors bear the residual value risk of fleet vehicles after a lease expires.
Also, 76% of the pool consists of rated obligors of medium and large corporate size, according to Moody’s.
But the company experienced a significant spike in 30-plus-day delinquencies in 2017 (5.17% from 1.56%) and 60-plus-day late payments (2.86% vs. 0.63%) the year prior.
According to Moody’s, Element said that the delinquencies were caused by “administrative” issues in the integration of the former GE assets into Element’s servicing system and that it "does not anticipate an increase in credit losses.”
This is Element's fourth securitization since adding the former GE assets onto its servicing platform.