As conference season continues, this week equipment lenders from across the country, including a large component of small-ticket regional players looking to crack into the capital markets, will storm the Essex House in Midtown Manhattan, attending Investor Opportunities in Equipment Leasing, Finance & Securitization.
This conference, co-hosted by the Information Management Network (IMN) and the Equipment Leasing Association (ELA), was originally planned for last fall, but was rescheduled due to its proximity to Sept. 11. About 250 industry professionals are expected to attend.
Equipment volume in the public and private term markets was down last year to about $9.6 billion, compared to roughly $14 billion in 2000, according to Thomson Financial. This was partly attributable to continued consolidation in the sector, as well as investor preference for more liquid assets, demanding a premium in the off-the-run sectors. On the private side, the ABCP market is said to have picked up some of the financing needs, sources said (see ASR 6/11/01).
This year, however, bankers expect to see more deals from the mega issuers, such as John Deere, Caterpillar, Textron, Case and The CIT Group, all of which are investment-grade finance companies.
"I think as credit spreads continue to gap out, particularly in the two-to-three year area for unsecured paper, you're going to see more asset-backed paper from investment-grade issuers," said Chris Beaudet, of Deutsche Banc, which had the largest share of equipment volume last year.
Other potential issuers in the public market include DVI, CNH and IKON. On the private side, Sky Financial, which issued three times last year with dental equipment-backed deals, is expected to continue funding in the ABS market, as well as Marlin Leasing, Interpool, MicroFinancial, and Great America Leasing.
The consolidation machine
Continuing a trend that began in the late 1990s, many medium-sized players that have issued frequently over the last several years were scooped up by larger, better-capitalized entities. For example, First Sierra (later called SierraCities), a regular issuer of office equipment ABS, was acquired by American Express early last year, following a failed merger attempt with online B2B portal VerticalNet.
Though Amex is a regular in the credit card market, there's no telling if the company will ever securitize equipment receivables in the term market. Similarly, Heller Financial was acquired by GE Capital last year. Neither Heller nor SierraCities was seen in the market last year.
Perhaps drawing larger headlines, Tyco International acquired The CIT Group last fall, only to announce a divestiture in February of this year. Still, in the acquisition of CIT, Tyco Capital (as it was renamed) only came to the equipment sector once last year for about $1.1 billion, $500 million less than the prior year. CIT has already sold $1.2 billion into the ABCP market since Tyco announced it would re-spin-off CIT.
In 2000, Copelco Corp., once a frequent issuer, was acquired by a financing arm of Citibank. There was talk of a Copelco-originated deal hitting the market last year, but the issue never came.
Also, over the past two years, several lenders that had utilized securitization, such as Unicapital Corp. and LINC Capital, have gone under. Other once-prominent lenders, such as Advanta Corp., exited the business.
Gap out in secondary
Salomon Smith Barney recently noted that secondary spreads in the equipment sector have moved out substantially, and are at historically wide levels, owing largely to a few headline rating actions, namely a downgrade of several classes from two 1999 series of Heller Equipment Asset Receivables Trust by Moody's Investors Service.
Salomon sees this widening as a buy opportunity for investors willing to sacrifice liquidity. "Until new issues come to market in 2002, it is relatively more difficult to pinpoint exactly where equipment spreads are," Salomon states in its research. "A new issue of equipment would resolve the spread uncertainty."
Deutsche's Beaudet maintains that, depending on maturity, equipment will still price between 10 and 20 basis points behind primary auto triple-As. "The issue is not related to the collateral or the structure of the deals, it's purely liquidity," Beaudet said.
Although for the most part equipment deals have performed well, late last year a few deals, particularly those with exposure to truck leases to independent owner-operated truckers, were put on watch by the rating agencies, including Newcourt Equipment Trust 1999-1 securitization, and CIT Equipment Collateral 2000-1 (CIT acquired Newcourt in 1999). According to Moody's - which, along with Standards & Poor's, put the CIT and Newcourt deals on watch - increased costs for fuel and insurance, as well as a slowing economy, were the major drivers in the deterioration of this collateral.
Also, the used market has been saturated by a wave of trucks coming off lease in 2001.
Spotlight on backup servicing
Over the last two years, investors and rating agencies have increasingly focused on the importance of having a backup servicer in place, especially in light of the volatility of specialty finance companies seen in the last few years.
"It's not always the case that you can take the data from one system and upload it into another system, even if they're similar, without having to manipulate the data," said Denise Person, an equipment analyst at Moody's. The concern is that a transfer could be held up despite there being a backup servicer in place, which could lead to collateral deterioration. "There have been deals where we have seen some kind of interface developed [between the seller-servicer and the backup servicer] within so many days after the closing of the deal, to ensure a timely transfer."
It is said that software specialists are often among the first to leave a company when it discontinues lease origination, Person added.
"It's tough to find a quality backup servicer that can really assume the obligation that agencies are looking for them to do," Deutsche Bank's Beaudet said. "At the end of the day, you have to get comfortable with the seller-servicer as is, because if you're going to a backup servicer, it's already too late, in my mind."