The concentration of oil and gas obligors has risen in Enterprise Fleet Management’s next securitization, as it has in the prior two deals. That’s not necessarily a bad thing,
Oil/gas services represents 13.2% of the pool of the $700 million Enterprise Fleet Financing 2018-2, up slightly from 12.8% in 2018-1, according to Fitch Ratings. This industry had been the largest within every pool dating back to 2012-2, but was reduced in more recent pools in 2016 and 2017. Enterprise did not actively shy away from this industry, but, rather, the decline has been more indicative of less appetite within the industry for fleet management, the presale report states. EFM has observed rising demand from these obligors in the past year, as the industry has somewhat stabilized, leading to growing concentrations in the last three pools.
The performance of the sector, which represents a large part of the lessor’s managed portfolio, has recently been improving, something that Fitch Ratings chalks up to a stable macroeconomic environment, global oil production cuts and a survivorship bias among the remaining lessees.
In fact, Fitch thinks that a recent rise in delinquencies in Enterprise’s portfolio reflects the lower exposure to oil and gas obligors.
Construction, manufacturing, electrical contracting and HVAC contracting round out the remaining top five industries, representing 7.2%, 5.1%, 3.7% and 3.0% of the pool, respectively. In all, the top five industries represent 32.5% of the pool. This is a few percentage points higher than for recent transactions, and is primarily due to rising concentration in oil/gas services.
Among other rating considerations, approximately 97% of the leases are open-end, meaning the lessees bear the risk that the vehicles will be worth less than expected when they come off lease. The remaining 3.0% of the leases are closed-end, under which the trust will bear the wholesale market risk.
Trucks make up 86.4% of the vehicles in the pool, at the higher end of the range recently observed for the platform, which have ranged from 77.3% to 90%. “A heavy concentration of trucks could expose the trust to depressed used vehicle values in an increasing fuel price environment,” the presale report states. However, “sensitivity has lessened recently due to increased demand for trucks. Combined with lower fuel prices and improved fuel efficiency, this has driven truck values higher relative to car values.” With the exception of 2017-3, where leases in Texas and Florida were restricted due to hurricanes, Enterprise’s fleet has shifted steadily toward trucks, consistent with recent consumer demand.
Approximately 34.0% of the pool is manufactured by Ford, followed by Chevrolet and Nissan at 24.5% and 11.4%, respectively. While these high concentrations bear a significant exposure to specific manufacturers, they compare favorably to retail loan and lease pools with only one make, and are consistent with prior pools from the platform.
Three tranches of notes will be issued in the transaction, $183 million of money market notes and two term tranches with preliminary AAA ratings from Fitch due in February 2024. All of the notes benefit from 8.68% credit enhancement.
Merrill Lynch, Pierce Fenner & Smith is the structuring lead.
Annual excess spread is expected to be 3.24% based on the initial yield of the leases, expected note coupon and transaction expenses, down from all prior Enterprise transactions.