The equipment-leasing sector has suffered its share of stress this year, with industry-wide obligor credit woes trickling into deals and pushing spreads far outside historic levels. Though all-in yields are down, in line with interest rates - which could make securitization attractive despite the widening - origination volume is down as well, reflecting a slump in capital spending.
Still, through the end of the year, the market could see as many as six more transactions. Depending on whether or not a rumored one-off $1 billion deal for a one-time issuer comes to fruition, issuance could reach $7 billion, modestly shy of last year's $9.7 billion. This mystery deal (details on which sources have been hesitant to leak) is said to involve the sale of the company, and should feature a wrap. The transaction would apparently be a hybrid commercial risk/equipment lease securitization.
As for spreads, in the late 1990s, equipment deals were pricing three to five basis points behind prime auto, said Deutsche Bank Securities' Chris Beaudet. Last year, equipment spreads moved out 10 to 15 behind autos, and are now well beyond that.
According to Banc One Capital Markets, fixed-rate triple-A three-year equipment trades at about 50 over swaps, 13 points over its 52-week average. Three-year fixed-rate prime autos trade at 12 over swaps.
As indicated, spread widening in the sector has been associated with a string of credit events and/or rating reviews hitting even the higher tier names, such as Heller Financial and The CIT Group.
This time last year, it was becoming clear that transactions with high exposures to truck loans could have problems, though just about every collateral type has taken a hit to some extent.
"It's general across all collateral types," said Deutsche's Beaudet. "In corporate America there are a lot of bankruptcies occurring for a multiplicity of reasons, and as a result thereof, some of the deals have come under stress."
Two CIT Group transactions, backed by originations via AT&T Capital Corp., have had problems mostly due to improperly valued loans. In this case, the originator valued the loans based on projected cashflows from acquired medical practices ("business value loans"), as opposed to valuing the loans based on the underlying collateral. In March, Moody's Investors Service reported that CIT determined these loans were in violation of the P&S agreements, and CIT would repurchase the contracts under certain conditions, such as when the loans are 90 days delinquent. CIT acquired Newcourt Credit Group in 1999. Newcourt had acquired AT&T the prior year.
In August, several classes of Conseco Finance Vehicle Trust 2000-B were downgraded, including two A classes. Moody's took the A-2 class down to Caa2' from A3,'and the A-3 class to Caa2' from Baa2.'
The transaction was backed by commercial loans and trailers. Beyond pool-specific credit problems, Moody's cites industry weakness as a result of lower freight shipments and higher fuel and insurance costs.
Other problems in the sector can be traced to the servicer level, such as with Centerpoint Financial Services, which announced earlier this year that it would cease originations, followed by a servicing transfer to U.S. Bancorp Portfolio Services.
Though this year is expected to be disappointing from a volume perspective, 2003 should bring some new issuers to market as well as the staple names. Like elsewhere in the ABS market, the sector should see some crossover issuance from the unsecured markets.
"We'll see more deals where securitization is used as a funding alternative, because capacity in the unsecured and the bank market is limited," Deutsche's Beaudet said. "Securitization is being viewed as an alternative for leveraged transactions at levels I haven't seen since the early 1990s."
Still in the pike, HPSC Inc. has yet to securitize in 2002. Earlier in the year, the dental and medical equipment lessor indicated it was planning a securitization for the fourth quarter, though officials at the company did not return phone calls as of press time. HPSC has not hit the market since December 2000 when it brought a $500 million offering via Credit Suisse First Boston. The company has an approximate $400 million conduit facility with MBIA.
Frequent medical issuer DVI Inc. is also said to be prepping a deal before yearend. The company traditionally comes to market with a $400 million to $500 million transaction via Merrill Lynch (though in its last deal it ran with co-lead Banc One Capital Markets as well).
According to sources at Moody's, there could be as much as $3 billion in issuance before yearend, much from the small and mid-ticket sector, including office, printing, and machine tools.
As reported in last week's Whispers section, MicroFinancial announced that it would pare down its origination operations and market itself as a special servicer. It's unclear whether or not there will be another securitization from the point-of-service equipment lessor.