Element returns with $600M fleet lease ABS after taming delinquencies
A cleanup of some 2017 servicing snafus has restored delinquencies on Element Fleet Management Corp.'s managed portfolio to their historically low levels, and now the sponsor is returning to the securitization market.
The Toronto-based firm is marketing $600 mllion of notes to U.S. investors in a transaction called Chesapeake Funding II LLC Series 2018-2, according to rating agency presale reports. The deal is backed by the lease receivables and resale value of 296,522 commercial vehicle contracts to mostly high credit-quality obligors in high-tech, health care/pharmaceuticals, construction and other sectors.
Element, North America’s largest corporate vehicle leasing firm, benefits from the high credit quality of its clientele, 57% of which have investment-grade ratings. Yet late payments spiked last year due to what Moody's Investors Service describes as to internal “administrative" issues arising from a merger of its servicing operations. The CAN$18 billion (US$13.8 billion)-asset firm last year shifted legacy contracts serviced at its Eden Prairie, Minn., center to its operations in Sparks, Md., according to presale reports. Ninety-day delinquency rates on its managed portfolio, which were at 0.63% in late 2016, then shot up to 5.06% in the first quarter of 2017. They have since fallen back, and were at 0.69% at the end of May 2018.
"Element has indicated that the increased delinquencies are administrative in nature and does not anticipate an increase in credit losses," Moody's presale report states.
The servicing merger was required to combine Element’s legacy contracts with those of GE Capital’s fleet management system that Element acquired in 2015. Element at that time was also absorbing the servicing requirements from its 2014 acquisition of PHH Corp.
The swelling delinquency rates were still evident when Element last came to market in April 2018, At the time, Moody's noting 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.
The notes to be issued in the new deal features the same credit enhancement levels asr each of the past five deals issued since the GE merger, including its first 2018 deal. The The US$555.2 million senior tranche of Class A fixed- and floating-rate notes benefit from 11.25% CE, including subordination, 3.09% overcollaterization and a 1.03% reserve fund. The Class A notes have received preliminary triple-A ratings from Moody’s Investors Service, DBRS and Kroll Bond Rating Agency.
The remainder of the capital stack includes $17 million in Class B notes (with enhancement of 8.5% and double-A ratings) and Class C and D tranches of $13.92 million apiece (with CE of 6.25% and 4%, respectively). The Class C notes are single-A rated, and the D notes are triple-B.
All of the notes are backed by the beneficial interest in the vehicles held by two titling trusts, Gelco Fleet Trust (GFT) and D.L. Peterson Trust (DLPT), representing the legacy assets from GE Capital and Element. Both trust have pledged the interest to Element's bankruptcy-remote entity, Chesapeake Finance Holdings II, which in turn receives a loan secured by obligor payments and the vehicles residual book value of more than CAN$6.2 billion (US$5.3 billion).
The transaction provides for increased credit enhancement should the residual value loss ratio exceed 12.5%, according to presale reports.
The leases in the transaction are nearly all open-end leases, which place the resale value risk onto lessees rather than Element. However, the pool includes a seven-month revolving period in which additional closed-end leases – or even fleet loans – may be acquired by the issuer.
The contracts have an average balance of $20,798, and most of the vehicles (79%) are passenger sedans or light-duty trucks, which Moody’s points out have a broader resale market than heavy-duty trucks or other specialized vehicles.