The performance of some of the more esoteric kinds of securitization, such as aircraft, railcar and auto fleet leases, will continue to benefit from steady, if modest economic growth in the U.S. and abroad, according to Moody’s Investors Service. However, anemic growth in global trade will be a negative for bonds backed by container leases
And the performance of some other off-the-run assets, such as securitization of wireless tower leases, utility fees, and rental car fleets, will be driven by more idiosyncratic factors.
In the $5.3 billion aircraft leasing market, lessors will continue to benefit from “steady, albeit slightly lower” passenger growth, according to Moody’s (projected at 5.5%-6.5% next year by the International Air Transport Association). That, along with sub-$60 a barrel crude prices projected into next year, sustain the economics and the demand for older fleets that airlines globally will continue to utilize mid- to end-of-life passenger airliners.
A number of transactions completed in 2016 were backed by aircraft at the middle or end of their useful lives, according to Anthony Nocera, a managing director analyzing commercial and non-traditional ABS at Kroll Bond Rating Agency.
“From what we’ve been hearing, I would say the number of deals for next year should be about the same level as 2016,” he said.
Another driver for aircraft leasing is the multi-year backlog of international airline orders on new-generation jets under development with Boeing and Airbus.
Continued health for airline margins (6.5%-7% in 2017, according to the IATA) will support credit quality in aircraft lease transactions, and increase values and lease rates for the larger jet models such as the Airbus A330/300 and Boeing B777 lines.
According to Moody’s, interest rate hikes will boost the performance on aircraft securitizations dating back to 2013 due to the favorable impact of fixed-rate bonds backed by the floating-rate leases.
The performance of the $4.5 billion container lease securitization should stabilize as prices and lease rates bottom out after six-year decline that abated in the latter half of 2016, according to Moody’s. But overcapacity in shipping lines and “sluggish” worldwide trade growth of only 2.7% will likely keep rates from rising too much.
A wild card will be the trade policies of the incoming Trump administration. A tougher stance on key trading partners or the introduction of severe tariffs, should they result in a sustained global trade slowing, “would pose risk to container lease ABS transactions.”
Rental Cars, Corporate Fleets
The outlook is more favorable for rental car and corporate auto fleet lessors. The rental-car ABS market, which has grown to about $12 billion in outstanding volume, will remain a “significant” source of financing for the largest sponsors in the space, Avis Budget Group and Hertz Corp. Annual issuance ranges from $2 billion and $3 billion.
The largest players in the rental car industry – Avis, Hertz and Enterprise Holdings (which does not finance its fleets in the securitization market) – each have stable operations: collectively they hold about one-third of the airport rental-based market; have steady volume and pricing, and have each focused on operational and cost efficiencies to grow revenues. That keeps performance of their deals stable. However, Hertz faces a “substantial” depreciation adjustment this year due to the abundance of less popular compact cars in its fleet.
The corporate-fleet sector should sustain low levels of delinquencies and losses in pools underlying the transactions which amount to between $3 billion and $5 billion a year. The industry has performed well historically: net ABS losses haven’t exceeded 0.1% in the past five years for any of the top fleet lessors (Element Financial’s Chesapeake, Hertz Fleet Lease Funding and Enterprise Fleet Financing.)
Investors eager to dive into pools of equipment-finance contracts from major U.S. carriers have had only one option in this nascent field: Verizon Wireless’ two securitizations of device-payment plans that were launched in the second half of 2016 – with both deals totaling $2.6 billion in overall notes issuance.
Only Sprint Corp. has formally announced DPP securitization plans, although ratings agencies such as Moody’s and Standard & Poor’s are expecting all four major U.S. carriers to take the dive eventually. But Moody’s expects 2017 issuance to arrive at a “measured pace,” despite the rapid increase in the mobile financing assets of the Verizon, AT&T, Sprint and T-Mobile (from $32 billion in 2016 to $55 million by 2018). Some of the carriers may continue to rely on bank-supported facilities as they transition from equipment subsidies to full-fledged (and zero interest) financing of devices, and have adequate capacity to fund their existing portfolios without resorting to bond markets.