Equipment leases were one of the first asset types to be securitized, beginning in 1985 with the securitization of Sperry Finance computer leases. Although still a relatively small niche within the asset-backed securities market, the investor base for lease-backed securities continues to grow as investors have become more comfortable with the asset class and have increased their exposure to equipment lease asset-backed securities (ABS). Heightened investor acceptance can be attributed to a number of factors, including increased market activity, larger deal sizes, a steady amount of issuance from larger, repeat issuers, and a desire by investors to diversify some of their holdings away from consumer-related ABS. The leased equipment is typically essential to the obligor's day-to-day operations, and the obligors are typically diversified in terms of both geographic and industry concentrations. Prepayment risk is minimized by the "hell-or-high-water" lease provisions that discourage prepayments. Several issuers often substitute new leases for prepaid leases, thereby helping to provide stability and the ultimate realization of the average life expected at the time of pricing. As the underlying leases are typically five to seven years in duration, the average life of transactions is in the two- to three-year range, and average life sensitivity to change in CPR assumptions is often minimal.
Equipment lease issuers frequently access both the public and private markets simultaneously in the same transaction by issuing the senior classes in the public market and subordinated classes via private placements. Often, there is a class that is rated AAA' that is split into a money market tranche and several other tranches with varying maturities. Requests for classes rated BB' and B' increased in 1999 after dropping considerably in the aftermath of the August 1998 bond market downturn but have declined more recently. In many cases, these below investment-grade-rated subordinated classes are held by the originator/issuer.