General Electric’s exit from most of its lending businesses could be bad news for both its borrowers and the investors who buy these loans and leases via the securitization market, according to Moody’s Investors Service
Over the next two years, GE’s asset sales will shrink GE Capital to roughly 10% of the parent company’s operating earnings. Moody’s expects that the GE Capital unwind will likely result in the sale or early liquidation of the securitization trusts and servicing platforms for outstanding deals backed by asset-based loans, inventory financing and equipment loans and leases.
A transfer of servicing could expose some of these deals to unexpected risks, “especially if less experienced and much smaller entities take over servicing,” Moody’s stated in a report published Friday.
GE Capital has approximately $4.8 billion of securitizations outstanding, including $2.6 billion in equipment loan and lease-backed transactions in the small-ticket, mid-ticket and transportation subsectors; $2.0 billion in dealer floorplan financing deals and one $200 million asset-based lending facility.
Moody’s singled out the December 2014 asset based loan transaction, GE Asset Based Master Note LLC, Series 2014-2, as one in which GE Capital’s role as a servicer is an “important factor” in its ratings.
The transaction is a securitization of asset-based loans, which are revolving loan facilities backed primarily by account receivables and inventories with some collateral consisting of machinery, equipment and real estate. Borrowers in the pool are mainly middle-market companies in various industries including retail, metals and mining, healthcare, consumer goods and construction.
“Such borrowers are typically of weaker credit quality,” the report states. “As a result, the transaction requires intense servicing to monitor the financial health of the borrowers and the value of the assets backing the transaction.”
GE Capital’s floorplan ABS deals also require highly specialized servicing, according to Moody’s. The issuer completed two deals in 2014 and two deals this year. They are backed by loans made to a diversified pool of large, mid- and small-size dealership inventories of discretionary consumer products such as boats, recreational vehicles, lawn and garden and technology.
In the deals, GE Capital acts as the master servicer, as an originator of the loans, guarantees the performance of obligations of the other originators, and is the administrator for the trust. Further GE Capital’s inventory financing business, Commercial Distribution Finance, serves the as a sub-servicer in the deals and is also an originator.
The transaction documents limit who can take over servicing . “Any replacement servicer must be currently servicing a floorplan portfolio, have experience and be legally qualified to service the loans, and have a long-term debt rating of at least Baa3,”the report states. Nevertheless, Moody’s is concerned that a servicing transfer could not only impact ratings but also disrupt the flow of credit to the dealers under their present facilities.
“In floor planning, time is of the essence in servicing transfers because of the high turnover of some of the product that serves as collateral for the line of credit,” the report states.
Here's a list of what GE Capital's has issued over the last two year.