Element Financial Group, North America’s largest lessor of corporate work-related vehicles, is readying a second-term issuance of $500 million in notes through its Chesapeake Funding II trust series.
The Series 2016-2 follows the $600 million offering in March, which together account for about half the nearly $2 billion in Element Vehicle Management Services Group's servicing portfolio.
The leases backing the latest deal are tired to mostly cars and light-duty trucks (82% of the collateral pool) that Element VMS provides to companies across multiple sectors.
The five-class note structure is similar to 2016-1, with two Class A tranches atop the capital stack and equally divided at $231.36 million apiece between fixed-rate and floating rate instruments. Both are triple-‘A’ rated by both Kroll Bond Rating Agency and Moody’s Investors Service.
The new term notes also share the same credit enhancement features as the earlier series, with the Class A notes carrying 12.5% overcollateralization.
The Series 2016-2 also includes $14.14 million in Class B notes, rated ‘AA’ by Kroll and ‘Aa2’ by Moody’s; $11.57 million in Class C notes rated ‘A’/‘A2’; and $11.57 in Class D notes rated ‘BBB’/‘Baa2’. The notes will include an 11-month revolving period where additional leases may be added.
Series 2016-2 provides less diversity than from 2016-1, with a larger percentage of the pool exposed to the top lessee holders that are mostly medium-size to large corporations. Eight percent of the 2016-2 pool is comprised of leases to the top leasing company in the pool, compared to 5.5% in 2016-1; for the top 10 lessees, 2016-2 is exposed at 37.3% compared to 30% in the March series.
But the underlying credit quality of the companies are strong, reports Moody’s; 69% of the top 200 lessees are rated at an average of ‘Ba1’ (the highest speculative-grade rating on Moody’s scale) and 52% are investment-grade.
Most of the vehicles leased are for fleets of sales and services vehicles. The open-end lease structure of the deals protects the issuer from residual risk value of the vehicles, which are borne by the corporate lessee instead.
Element is securitizing leases that were originated through the former GE Capital fleet management platform that the Toronto-based Element acquired in August 2015. Element (which trades on the Toronto Stock Exchange under “EFN”) has built its fleet management business through the GE Capital acquisition as well as the 2014 buyout of the U.S. and Canadian corporate-fleet leasing business of PHH Corp.
Element, which has a market share of 38%, is planning to split its company into two separate firms for fleet management and commercial finance, with the fleet management firm continuing to operate under the Element Fleet Management name.