John Deere maintaining ABS performance despite trade wars

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Despite the global-trade wars’ ongoing financial pressure on the U.S. agricultural industry, John Deere Capital Corp. has yet to see serious signs of distress from borrowers who’ve financed farm equipment through the Deere & Co. lending unit.

Both Moody’s Investors Service and Fitch Ratings have assigned preliminary triple-A ratings to a new $1.04 billion asset-backed transaction sponsored by John Deere, each expressing few worries that the tariffs on exported crops will result in greater loan delinquencies and losses to ABS investors.

“Although farm balance sheets are weakening, they remain strong, supported by higher government aid, trade assistance, conservation and farm program dollars,” according to a Moody’s presale report for John Deere’s latest securitization pool. “Altogether, these mitigate some of the risks from trade tensions over the past two years as delinquencies have not materially increased,” the report added.

Moody’s says losses in recent John Deere securitizations have remained “consistently low,” as “(f)armers tend to offset the decline in demand for crops affected by tariffs by using their equipment to produce other crops, supporting equipment demand.”

Fitch noted it has seen some slightly “elevated” cumulative net losses in 2014-2019 John Deere-sponsored deals, compared to prior years. That might suggest higher default frequency will occur in John Deere’s $19.5 billion managed portfolio of farm and construction equipment loans, but recovery rates have remained “relatively stable,” allowing Fitch to maintain its 1% base-case loss proxy that it has previously assigned to the lender’s securitizations.

Moody’s and Fitch assigned their respective top ratings to three classes of senior note to John Deere Owner Trust 2020-1: a $335 million Class A-2 tranche, a $296.9 million Class A-3 offering, and a Class A-4 tranche totaling $79.2 million.

A $299.5 million money-market tranche is rated P-1 by Moody’s and F-1+ by Fitch – again, each agency’s highest rating for short-term structured-finance notes.

The notes are paid through the regular contract payments from equipment owners, of whom about 65% pay on an annual basis. Approximately 75% of the loans are for farm equipment, and the remainder are for the construction industry. Over 57% of the loans are for new equipment as well.

The average contract balance is $53,023, with weighted-average original terms of 55.2 months. The loans in the pool have an average seasoning of 12.1 months.

Borrowers, who have a WA FICO of 760, pay an average APR of 3.1%. As of October 2019, John Deere Capital Corp. serviced a managed portfolio of $19.5 billion.

Bank of America, Citigroup, Credit Agricole and HSBC are the lead underwriters in the transaction.

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