Factory orders for durable goods might have dropped significantly, according to the U.S. Commerce Department figures released last week. However, the dip is apparently not enough to undermine performance on leases for transportation and equipment, which secure GE Capital's latest midticket equipment term ABS deal. Indeed, performance on the issuer's underlying collateral have been so strong that the reduced initial credit enhancement levels and incorporated a smaller reserve account and a step-down mechanism in its latest deal structure.
The $1 billion transaction, GE Equipment Midticket LLC, 2006-1, is GE Capital's fourth such deal to come to market and priced last week. Morgan Stanley is acting as lead manager on the transaction.
Previous deals, issued in 2003, 2004 and 2005, performed so well that GE and Morgan Stanley decided to reduce its initial credit enhancement by 105 basis points for class A notes, 55 basis points for class B notes and 10 basis points for class C notes, as compared to the 2005 deal. GE reduced enhancement on the deal because the sizes of Class B and C declined by 50 basis points and 45 basis points, respectively, according to Fitch Ratings.
Analysts say the program changes are another sign of strength in the midticket equipment lease asset class. That subsector has held up well, even though the Commerce Department reported last week that factory orders in the U.S. dropped 4.7% in October. That is the third decline in the past four months, and the biggest dip in more than six years, according to press reports. Economists blame slowdowns in auto sales and home construction activity for the overall economic slowdown.
"There is a lot of commercial demand for this product," said Ravi Gupta, a Fitch Ratings analyst. "This industry benefits from strong transportation distribution. Retailers are expanding, and that requires drivers for logistics and inventory delivery."
Transportation equipment comprises much of the underlying collateral for the GE deal. That particular subsector - which includes trucks and trailers - has performed well.
"These deals are performing very strongly, with minimal losses to date," Gupta said. "We expect that to happen for this deal as well."
The deal's initial reserve account was also reduced, and will be funded at 1.95% of the initial pool balance, compared to 2.05% from the 2005 deal. Similar to previous transactions, the 2006-1 series will have 50% of available excess spread, which will be used to turbo the notes and create over collateralization (OC). Furthermore, the transaction includes a step-down mechanism, which is new to the series. The reserve account will drop dollar for dollar as OC is increased, due to excess spread. The step-down will occur after the OC has reached 45 basis points of the initial pool balance, which is expected to occur on or prior to month eight, according to Fitch. However, the mechanism will only apply if there is a substantial amount of OC. Any excess spread will be used to cover any losses on the notes.
Overall, the program received triple-A to triple-B ratings from Fitch and Standard & Poor's on its senior through subordinated notes.
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