After a shaky three-year period characterized by low issuance, corporate bankruptcies and consolidation, dubbed the perfect storm,' the equipment-least sector is ripe for a comeback, say market observers. Buoyed by strong demand for agricultural equipment, more experienced issuers and higher lease origination volumes in general, the sector is expected to see up to $10 billion in issuance this year, compared to $7.6 billion in 2004, and an even greater increase in the years to follow.
"All things are pointing positive in this sector from a macro perspective," said Fitch Ratings analyst John Bella. An increased demand for agricultural and construction equipment is driving the growth in mid-ticket portfolios - loans for equipment costing between $100,000 and $500,000. Other sources have said the rise in commodity prices may be spurring the demand for more agricultural and mining equipment.
In terms of specific issuers, Bella said he expects the big names in the sector such as The CIT Group, CNH Global and Navistar International to bring two deals each to the market in 2005. CIT priced its first transaction of the year, totaling $804 million, March 15, via JPMorgan Securities and Wachovia Securities. Less-frequent issuers, such as GreatAmerica Leasing Corp. and Marlin Business Services Corp. - as well as behemoths Caterpillar and Deere & Co. - should each bring one deal, added Bella. Fitch rates 85% of the equipment lease transactions in the market place, and expects to rate at least 11 deals this year.
"The big wild card is [General Electric]," said Bella. G.E. has the capacity to issue $1 billion in equipment-lease ABS, but it is difficult to tell how much of that capacity G.E. will use, due to the unknown status of the company's funding needs.
Bella also noted that during the past three years of consolidation and corporate bankruptcies in the sector, a number of the smaller leasing companies have been forced out, and the larger ones that remain today are more sophisticated and better able to service their portfolios. "The companies left today tend to be much stronger from a corporate perspective, as opposed to the companies that had trouble in the nineties," he said. Those companies used securitization as their sole means of funding in the capital markets, and if the company went down, so did its ABS. The remaining companies in the equipment lease market today are large enough so that securitization is just part of their overall funding strategy.
After the sector rebound in 2005, Bella expects even more issuance in the years to follow. "Certainly in 2006 and 2007 we expect to see a more significant increase in securitization volume," he said. That is due, in part, to one of the very factors that caused issuance to shrink in recent years; consolidation. Total issuance declined in 2001, 2002 and 2004 partly because smaller issuers were acquired by larger ones. Additionally, many of those acquisitions carried non-compete clauses whereby executives from the acquired companies agreed not to start their own leasing companies for two to three years. In the next few years, many of those clauses will elapse, according to Bella, and some of those executives are likely to start new leasing companies.
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