Kubota enhances support for $466M ag equipment ABS

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Agricultural equipment manufacturer Kubota Corp. is featuring higher credit enhancement levels for its next securitization to offset potentially higher investor risk from the economic effects of the coronavirus outbreak.

According to presale reports from Fitch Ratings and Moody's Investors Service, the notes sold from the $466.5 million Kubota Credit Owner Trust (KCOT) 2020-1 will benefit from an approximate 5.5% in credit enhancement, consisting of a 4.5% overcollateralization of asset receivables that is $22 million above the notional value of the bonds being sold to investors.

That exceeds the total 4% credit enhancement for the previous $800 million deal issued in May 2019 from the securitization platform sponsored by Kubota Credit Corp., the retail financing arm of Kubota Tractor Corp., itself a subsidiary of Kubota Corp.

Kubota will also establish a 1% level on the deal's reserve account, up from 0.5% on KCOT 2019-1.

The 5.5% level for Kubota Credit's seventh ABS transaction since 2014 is the highest that the Grapevine, Tex.-based lender has ever provided on a securitization of receivables of retail contracts it underwrites for consumer purchases of Kubota-branded agricultural, construction and turf equipment.

As a leading manufacturer and distributor of compact tractors, Kubota almost exclusively pools loans for new small-farming equipment to borrowers with exceptional credit profiles (the weighted average FICO is 738 for the 25,383 contracts in the pool, with WA APRs of just 0.16%). As a result, net losses have historically been low for Kubota, with its managed pool and term ABS transaction all tracking below 1%, according to Fitch.

But because of the macroeconomic risks brought by the COVID-19 outbreak – a global shutdown of commerce and massively rising jobless levels in the U.S. – Fitch has arrived at higher base-case loss proxy of 1.4%, up from 1.15% in KCOT 2019-1. Moody's has raised its expected cumulative net loss levels to 0.65%, up from 0.55%, because of the stresses from the pandemic. Among those is KCC's decision to stop repossessing equipment for delinquent loans on April 1.

The pool has a loan-segment concentration in line with prior Kubota deals, with 64.1% of the contracts issued for agricultural equipment, 30.3% for construction and 5.7% for turf.

Kubota services all of the loans.

According to Fitch, Kubota will market three tranches of term ABS notes, all with preliminary AAA ratings: a $147 million Class A-2 tranche due December 2022, a $167 million Class A-3 offering due March 2024 and $50.47 million in Class A-4 bonds due July 2026. Kubota will also offer a $102 million money-market tranche with its highest short-term rating of F1+.

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