Compared to last year, when volume neared $10 billion, the term equipment sector has been slow, at just about $4.2 billion year-to-date, although innovation in the sector is hardly dead. For example, industry rumblings indicate that the first-ever equipment net interest margin (NIM) deal is in the works for the fourth quarter.
Though unconfirmed, Rothschild is said to be structuring the transaction, which will be issued simultaneously with a more traditional equipment deal from the same issuer, both being placed in the true private market. Sources at Rothschild did not return calls regarding the deal, and details were unavailable.
According to bankers, an equipment NIM would be structurally challenging, especially given that excess spread in equipment deals is generally already monetized. Because equipment leases (sometimes dubbed "hell or highwater" leases) tend not to be prepayable, the deals monetize the excess spread by discounting the cashflow coming off the collateral to the weighted average financing rate.
For instance, if an equipment lease collateral pool is cashflowing 18%, an issuer might discount the cashflow in a securitization to the 6% area, so that $100 worth of collateral will yield $104 in proceeds.
In that example, a banker notes that the $4 on top of the $100 could be viewed as a NIM, because it is monetizing the excess spread.
"So is an equipment NIM something new? It depends how they're doing it," the banker said.
Apart from the pending NIM, it is understood that The CIT Group is near pricing its $1 billion hybrid small ticket/large ticket deal via Deutsche Bank, also considered innovative for the equipment sector.
Earlier in the year, Rothschild brought micro-ticket lender Golden Eagle Leasing to market, pricing an unwrapped $33 million deal.
In terms of numbers, the equipment sector has been slow this year, partly attributable to unfavorable conditions in the 144A market. According to sources, a larger portion of equipment receivables has been going to the conduit market as well. Possibly the biggest factor, however, is the continued industry consolidation.
Of the headliners, GE Capital recently announced that it was buying Heller Financial, which will theoretically allow Heller more access to capital outside the securitization market. Similarly, American Express now owns SierraCities, once a regular ABS issuer. The CIT Group, however, which was acquired by Tyco International in March, is apparently still very much a player in the market.
If not swallowed by larger entities, a lot of the smaller players have fallen by the wayside in the past year or so, including UniCapital Corp., Leasing Solutions, T&W Finance Corp., Prime Leasing, and Linc Capital.
"I still believe that there's going to be some more consolidation among the smaller companies," said Warren Kornfeld, director of securitization at William Blair & Co. "With Heller being acquired by GE Capital, I think there's a big opportunity for a couple of companies to slip into the mid-size market. I think those companies have to come up with a new model. What it is, I don't know."
Currently there are only a few middle market players, including DVI Inc., HSPC, Marlin leasing, and Great American Leasing.
Merrill No. 1
So far this year, Merrill Lynch has made a notable push into the equipment sector, bringing close to $2 billion to market for the No. 1 spot, and about 50% of the market share. Last year Merrill managed less than $500 million in equipment, according to Thomson Financial.
Industry sources attribute Merrill's new prowess in equipment to Ted Breck taking over the helm of the securitization group. Equipment is apparently one of Breck's areas of expertise.
Merrill was lead on the recent $500 million deal for Xerox Corp., and before that, back-to-back deals for DVI Inc and Case Credit Corp., for approximately $1 billion in proceeds.