Lower recent deferral rates for asset-backed securities collateralized by equipment loans and leases have improved payment receivables for issuers.
But those improving conditions may prove fleeting, particularly for sponsors of small-ticket equipment ABS, if the COVID-19 infection rate continues to trend upward.
“In recent months, most obligors with deferrals tied to COVID-19-related hardships restarted timely payments as certain economic conditions began to strengthen,” says an Oct. 6 report from Moody’s Investors Service. The ratings agency expects the percentage of equipment ABS pools with obligors still in deferral periods “to decrease through the end of 2020.”
The majority of transactions across all equipment ABS have restarted timely payments, with trucking ABS at close to 90%, agricultural and construction just over 75%, and small ticket just over 50%, according to the report.
Inga Smolyar, a vice president and senior credit officer at Moody’s, noted that the small-ticket equipment ABS sector leads in the share of obligors who have delinquencies following the completion of a deferral period.
“The small-ticket ABS is currently the most vulnerable, given that these are mostly small businesses and the obligors are still under a certain amount of stress in the current environment,” she said.
Equipment-payment deferrals had increased dramatically in the pandemic’s chaotic early months, according to.
Smolyar noted deferrals were highest in deals securitizing trucking-equipment obligations, ranging between 10% and 50%, followed by small-ticket obligations held by consumers and small businesses, peaking at nearly 40% of collateral.
The market has since rebounded as business openings rebounded following initially government-mandated closures of non-essential businesses last spring.
Smolyar noted that the high level of deferrals in the second quarter prompted the agency to put several trucking and transportation as well as small-ticket ABS deals on review for downgrade. It has since confirmed all of the ratings given the deferral cure rates combined with the credit enhancement available for each tranche, she said, although it has increased the expected losses on a few equipment ABS deals with higher deferral rates.
The report notes that a resurgence of COVID-19 infections and delayed passage of additional federal stimulus pose performance and cash-flow risks, as would reinstatement of state moratoriums on equipment repossessions.
A resurgence of COVID-19 would likely result in a partial reversal in the opening of the economy and more stay-at-home orders and shutdowns, resulting in an increase in obligor defaults in all subsectors of equipment ABS, Smolyar said. In addition, it would disrupt consumer spending and business activity, likely increasing payment deferrals, delinquencies and ultimately defaults.
COVID-19 infections and death rates have trended upward in October.
“Cyclical sectors such as transportation and small business will be impacted more, while agriculture and construction will fare better and will depend on government support,” Smolyar said.
She added that transactions securitizing small-ticket obligations held by large corporates would be impacted less.
For example, deals “sponsored by MassMutual Asset Finance LLC, with zero deferred contracts, will continue to benefit from strong obligor credit quality,” the report stated, adding, “These transactions are backed by loans and leases to large corporate borrowers and the federal government, which are generally better positioned than small obligors to manage the downturn.”
