MassMutual Asset Finance is putting less of its business with the federal government into its next equipment lease securitization.
The $770 million MMAF 2018-A is also more concentrated than prior transactions; it is backed by 214 fixed-rate loans and leases to 47 unique obligors that MassMutual acquired purchased from financial services firms, according to Moody’s Investors Service. That is down from 202 contracts from 63 unique obligors in the sponsor’s prior deal, completed in November.
The top three obligors account for 15.2%, 14.1% and 12.7%, respectively, of the pool balance. The top five obligors make up approximately 57% of the pool, compared with 48% in MMAF 2017-B.
“This level of obligor concentration introduces performance volatility as the default of a single obligor could have a material impact on the transaction’s losses,” Moody’s stated in its presale report.
Compared to prior transactions, where the federal government is the largest obligor, MMAF 2018-A’s two largest concentrations are corporate exposures. Completed federal energy contracts constitute about 12.7% of the pool, down from 24% of the pool in the November transaction.
These federal energy contracts are for the installation of energy conservation equipment in government buildings, including motion sensors, automatic temperature control devices, lighting retrofits, improved heating and cooling equipment, chillers, boilers and water conservation measures, according to Moody’s.
Contracts backed by the U.S. government are not subject to appropriation risk. However, the contracts are subject to other risks such as budget, payment delays and government shutdowns. In addition, a majority of the federal energy contracts have unique payment schedules. (The deal’s reserve account is designed to address risk of delays in payment from the federal government.)
Despite the reduced exposure to federal energy contracts, the MMAF 2018-A pool has a better credit quality with a lower weighted average rating factor (WARF) of 329 than previous securitized pools. That’s because there is a higher percentage of investment-grade obligors and a smaller percentage of obligors with very low non-investment-grade ratings (single-B or unrated). By comparison, the November transaction has a WARF of 582 and one completed in April 2017 had a WARF of 675. (Higher ratings are assigned lower rating factors; therefore the lower the WARF, the higher the credit quality.)
The residual values of the leased equipment represent approximately 7.3% of the 2018-A pool, higher than the 5.9% in the November transaction but lower than the 11.1% in April transaction. Residual values tend to increase performance volatility, due to the risk that equipment will be worth less than expected when it comes off lease. Additionally, only 4% of the residual exposure is unsupported, meaning not guaranteed through a contractual obligation of the obligor or syndicator.
Five tranches of senior notes will be issued in the transaction: a $124 million money market tranche and four Aaa-rated term tranches with maturities ranging from 2021 to 2042. All five tranches benefit from 12.25% initial overcollateralization and an initial reserve fund of 0.5% of the pool balance, for total hard credit enhancement of 12.75%.
By comparison, the senior notes issued in the November transaction benefited from just 10% credit enhancement.
Bank of America Merrill Lynch is the lead underwriter.