Nomura Securities analysts said that since the start of 2012, they have seen an issuance surge in equipment ABS sector with roughly $3.7 billion issuance across five deals versus $1.65 billion issued in the first three months of last year.
The demand has been high as buyers have been wanting to move into off-the-run sectors and pick up yield.
This is why, they said, equipment ABS spreads have tightened 15-25 basis points at the senior level in the last three months.
In research released this week, analysts examined the relative value equipment securitizations. They found that CNH Capital and John Deere (JDOT) transactions provide some spread pickup as actual prepayments are usually faster versus the pricing speed.
Analysts demonstrated in the research that for a number of equipment deals from CNH and John Deere shelves, the average lives at pricing have been significantly different from realized average lives.
The difference is due to the fact that pricing speeds are usually much lower versus actual prepayments. Utilizing historical speeds from Intex to estimate future performance might result in more discrepancies becuase of the way the collateral is modeled, analysts stated.
The secondary market is also impacted and they suggested that buyers run their own prepayment assumptions when analyzing seasoned transactions.
Considering the tight spread level in the current environment, prepayment assumptions can have a considerable effect on returns, Nomura analysts noted. For instance, they found that for John Deere deals, the A4 tranche was on average seven months shorter versus the expected average life.
Given that the realized average life for John Deere's JDOT 2012-A A4 turns out shorter by the same order, the A-4 tranche provides an added spread pick-up of four to five basis points.
