John Deere readies another $857M equipment loan ABS

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John Deere Capital Corp. plans to issue another $857.23 million of bonds backed by retail installment sale and loan contracts secured by agricultural and construction equipment, according to rating agency presale reports.

The transaction, John Deere Owner Trust 2027-B, consists of a $200 million money market tranche and three term tranches rated triple-A by Moody’s Investors Service and Fitch Ratings: $320 million maturing in April 2020, $250 million maturing in October 2021, and $87.23 million maturing in July 2024.

All four tranches benefit from of 3.50% credit enhancement, unchanged from the equipment maker’s previous securitization.

There is also $21.98 million tranche of unrated notes.

MUFG Securities Americas is the lead underwriter.

Approximately 75% of the loans used as collateral are secured by agricultural equipment, and the other 25% secured by construction equipment. Agricultural collateral has performed better than construction collateral since 2011, and prior to 2011 would only comprise on average 65% of collateral in John Deere securitizations, according to Fitch.

Moody’s expects cumulative net losses of 0.55% of the collateral, while Fitch takes a more conservative view; it expects net losses to reach 1% of the collateral over the life of the deal. In its presale report, the rating agency noted that actual recovery rates repossessed equipment in deals printed between 1996 and 2015 would suggest lower losses, in the range of 0.75% to 0.85% of the collateral. However it chose to “err on the conservative side” due to the recent deterioration in the construction equipment sector.

Fitch also noted that the high concentration of agricultural equipment makes it vulnerable to systemic risk in the agricultural industry, though geographic diversification mitigates some of that risk.

Moody’s appears to have a more positive view of the sector. “Despite recent declines in farmers' net income and slightly increasing debt burdens, farmers' historically low overall debt burdens, and the low interest rate environment will help most agricultural equipment obligors continue to meet their debt obligations,” it states. Moody’s also notes “the improving health of the construction industry since the housing crisis”

John Deere has tapped into the securitization market at least once per year since 2003, making this deal its 29th public securitization. According to the presale report, its worst performing transaction came in 2007, with cumulative net losses of 1.28%. The losses were primarily driven by poor performing construction equipment.

Headquartered in Iowa, JDCC is one of the largest equipment finance companies in the United States, with a managed portfolio of approximately $32.02 billion. Its parent company, Deere, is the largest manufacturer of farming equipment in the world.

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