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John Deere sizing up $753M of ag/construction loan ABS

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Farm and construction equipment manufacturer John Deere is returning to the asset-backed market to finance retail and commercial loan contracts underwritten and serviced by one of its largest finance subsidiaries.

The sponsor, John Deere Capital Corp. (a 60-year-old firm rated A2 by Moody’s Investors Service), is packing the loans into a senior-only notes transaction totaling $753.2 million, including a $223 million money-market tranche with an early F1 Fitch Ratings and a P-1 from Moody’s.

The Class A-2 notes, sized at $220.96 million and due 2020; Class A-3 totaling $224.95 million; and Class A-4 of $82.3 million, are rated triple-A by each agency, and are supported by 3.35% credit enhancement.

The loans backing the notes are secured by both new and used equipment in the agricultural and construction industries. Agricultural equipment loan balances make up 75% of the pool’s aggregate balance.

The high concentration of ag equipment (41% of it used) can represent a risk from a diversity point of view, but Fitch notes that loss levels of farm equipment in John Deere securitizations have been low in the last decade — only 0.35% for all transactions since 2010, according to Moody’s.

In 2015 and 2016, losses were just slightly above the strongest-performing vintages between 2010 and 2014. The historical range of losses on paid-off transactions is between 0.09%-1.28%. Fitch projects losses of 1% on the current pool, unchanged from John Deere’s last deal.

Moody’s net loss expectation is only 0.55%. The agency cited its optimism on improving debt and income levels for farmers, as well as the increased stability of the construction industry since the housing crisis.

Nearly all of the construction equipment (22.03% of its 25.2% pool share) being financed is new.

Initial credit enhancement of 3.5% is unchanged from John Deere’s previous transaction, the 2017-B issuance from last July.

The pool consists of 17,870 contracts with an average balance of $45,464 and APRs of 2.56%. The loans, most of which (60%) are paid in annual installments, have average terms of 55 months and are seasoned 13.2 months. They are originated to borrowers with a FICO average of 761.

The loans have an aggregate balance of $812.4 million.

RBC is the lead underwriter.

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Equipment ABS Moody's Fitch