A pool of leases and loans on business-critical technology equipment will serve as collateral for $701 million in asset-backed bonds to be issued from the HPEFS Equipment Trust, 2023-2.
Among the deal's advantages is a high-credit-quality pool that contains contracts with low remaining terms on them, according to ratings analysts from Moody's Investors Service. The transaction will issue notes from six tranches, which will provide credit enhancement through subordination. The notes will also benefit from overcollateralization, and a full funded non-declining reserve account that equals 1.00% of the initial pool balance. Per annum spread is expected to reach 1.3%.
Mizuho Securities, Societe Generale Corporate & Investment Banking, TD Securities, and Wells Fargo Securities The deal's class A1 notes have a legal final maturity date of Oct. 18, 2024; classes A2 through C mature by Jan. 21, 2031; and class D has a final maturity of July 21, 2031, Moody's said.
Moody's notes that enhancement—as a percentage of the notes' outstanding balance—will build in the transaction to a target equal to 16.2% of the outstanding pool balance. That will include an overcollateralization floor of 12.70% of the initial pool balance, Moody's said.
Total hard credit enhancement of 37.45% shore up the class A notes, according to Moody's. In the rest of the deal the classes B, C and D notes benefit from total hard credit enhancement of 33.1%, 23.7% and 13.7%, respectively. Moody's also says the portfolio's high credit quality is another boon to the notes.
Contracts to obligors that are large institutions, a segment that has historically incurred low losses, make up about 90% of the pool's discounted balance in HPEFS's portfolio, Moody's said. They are better positioned to withstand economic stresses than small- and medium-sized businesses. Combined with the fact that the equipment is considered essential use, this is considered a credit strength.
The contracts also have low remaining terms, the rating agency said. On average the contracts have a remaining term of 36 months.
Some credit challenges exist, however, specifically the high obligor concentration. The top 10 obligors constitute about 64% of the initial pool balance, Moody's said.
Moody's expects to assign ratings of 'P-1' to the A1 notes, which have a legal final maturity date of Oct. 18, 2024. Classes A2 through B will receive 'Aaa' ratings; class C, 'Aa1' and class D will be rated 'A1'.
