John Deere is marketing $775 million of bonds backed by equipment leases.

The John Deere Owner Trust 2016 transaction will be a securitization of fixed rate retail installment sale and loan contracts secured by new and used agricultural and construction equipment originated and serviced by John Deere Capital Corp.

The trust will issue a $229 million money market tranche and three other fixed-rate senior tranches with preliminary ‘AAA’ ratings from Moody’s Investors Service: $234 million of notes maturing in October 2018, $222 million maturing in April 2020, and $71 million maturing in January 2023. All benefit from hard credit enhancement of 3.5%.

This will be the twenty-sixth public transaction that JDCC sponsored since 1992

Similar to transactions that John Deere has completed since 2011, the latest offering consists of approximately 75% of agriculture equipment and 25% of construction equipment, both new and used. In comparison, the 2003-2010 transactions consisted of around 65% of agricultural equipment and 35% of construction equipment.

“Agriculture transactions retain the risk inherent in their single-industry exposure,” Moody’s states in its presale report. “Exogenous factors, like a drought, can undermine crop yields while the recent declines in commodity prices have led to declines in farmers net income. However, insurance, derivatives, and farm owners strong balance sheets help mitigate these risks.”

While the performance of loans backed by agricultural equipment has generally been within Moody’s expectations, the performance of loans backed by construction equipment deteriorated more than the agriculture equipment backed loans during the 2007-2009 economic downturn. However, the performance of these loans since 2010 has improved significantly.

Approximately 62% of the portfolio are annual paying contracts.

Seasonality of portfolio amortization schedule may add to potential volatility in the transaction performance and may slow down repayment of the notes. This risk is mitigated by the even distribution of the annual pay contracts throughout the year.

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