The finance arm of agricultural equipment manufacturer Kubota Corp. has lowered credit-enhancement features on its first 2021 securitization, as the impact of the COVID-19 pandemic has waned in its managed portfolio.
The $790 million Kubota Credit Owner Trust (KCOT) 2021-1 is being supported by 4.75% CE, which is composed of a 4.25% overcollateralization, a 0.5% reserve account and an expected excess spread of 2.01%, according to a presale report from Fitch Ratings.
The credit enhancement levels provide a cushion against potential credit losses from the disruption of cash receivables from loan delinquencies and defaults. Kubota has historically set CE at 4%, but boosted the level to 5.5% last year after the onset of the coronavirus pandemic increased the risk of economic disruption to borrowers, despite their prime-qualified status.
But the contracts originated and serviced by Kubota Credit Corp. have usually experienced low delinquencies (net losses have been under 1%), and the temporary, COVID-19-related extension requests granted in April 2020 were only 3.9% of the managed portfolio. Extension activity returned to pre-pandemic levels by July and August 2020, according to Fitch.
Fitch rated the deal with a base-case loss proxy of 1.4%.
The $895.3 million pool of contracts in KCOT 2021-1 includes 37,231 contracts with an average balance of $24,048 and an average APR of 0.12%. The loans are seasoned an average of 8.75 months.
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 on the deal is 739.
The loans will back four classes of notes, including a $175 million Class A-1 money-market tranche with Fitch’s F1+ short-term rating. Also being issued are three tranches assigned preliminary AAA ratings from Fitch: a Class A-2 tranche totaling $282 million, due April 2024, a $263 million Class A-3 tranche due August 2025, and a $70.3 million Class A-4 tranche due March 2027.
Approximately 63.3% of the loan balances are for equipment intended for agricultural, while another 30.9% are being used in construction settings. The remainder (5.9%) are utilized in turf operations.
