A pool of John Deere loans on agricultural equipment will secure about $1 billion in asset-backed notes from the John Deere Owner Trust, 2023, driven largely by payments on agricultural and construction equipment.
Despite the lack of diversity in the collateral pool—the transaction has a high exposure to a single industry—the U.S. agriculture sector is seen as essential for food supply and is expected to withstand economic downturns with more resilience than other business sectors, according to a pre-sale report from Moody's Investors Service.
One potentially positive credit aspect includes consistently low delinquencies and net losses, and recent geopolitical events have played a part. Reduced crop supply, largely due to Russia's war on the Ukraine, had increased crop U.S. farmers' crop prices, Moody's said.
In one potential credit challenge, the pool has a large percentage, 68% of non-monthly pay contracts, and in fact are annual payment contracts, Moody's said. Together with the high concentration of agricultural equipment, the transaction could be exposed to performance volatility, Moody's said.
About 15,406 loans are in the collateral pool, according to Moody's. Agricultural equipment loans account for about 75% of the collateral pool, while construction loans account for another significant portion 25%, according to Fitch Ratings. Moody's noted that the greater presence of new (17.3%) construction equipment loans versus equipment helps to mitigate some of that risk, the rating agency said. Obligor concentrations also work in the transaction's favor. The top 10 obligors, for instance, account for 1.7% of the pool, while the top obligor accounts for 0.4%.
Overcollateralization of 2.50% of the initial discounted pool balance, and a non-declining reserve account of 1.00% of the initial discounted pool balance provide credit enhancement to the pool.
For its part, Fitch Ratings expects to assign ratings of 'F1+' to the class A-1 notes; and 'AAA' to notes through the rest of the structure. Moody's intends to assign ratings of 'P-1' to the class A-1 notes, while the A-2 through A-4 noted are expected to receive ratings of 'Aaa' notes.
The classes A-1, A-2, A-3 and A-4 notes have legal final maturities of March 15, 2024, March 16, 2026, Nov. 15, 2027 and Dec. 17, 2029, respectively.
