The Mexican equipment lease sector has been the focus of a bit of controversy lately.
Fitch Ratings put out a report in February in which it argued that, for a variety of reasons, outstanding transactions in this asset class do not deserve a triple-A on the Mexican national scale. The agency said that the highest achievable ratings for current deals would be double-A.
But triple-A ratings are what a number of these transactions have already earned, from Standard & Poor’s as well as from local competitor HR Ratings.
Fitch said that its criteria does allow it to rate deals in this asset class triple-A on the national scale. The problem is none of the Mexican transactions that have come out meet the criteria for a top-notch score.
“Some of the key questions revolve around obligor concentrations,” said Fitch Senior Director Sam Fox, citing one of the reasons why even deals with robust, experienced originators are lacking. “You either have to rate those obligors or you have to limit concentration more.”
In a relatively recent transaction that Fitch declined to name, the agency said that in addition to a three-month revolving period and credit enhancement of 8% that factored in excess spread, the deal allowed for “unknown” obligor exposures of 4%.
“Using simple math, this structure is not able to survive the default of its two largest obligors,” the agency said.
S&P sees things differently.
Obligor Concentration Limits
Alvaro Rangel, structured finance director in S&P’s Mexico City office, said that, while the agency does not have pre-established concentration limits for this asset class, it does factor concentration limits through additional stress in its default scenarios.
None of the deals rated by the agency, then, has exceeded concentrations that would be inconsistent with a triple-A national scale rating. The upshot is that of the ten outstanding transactions rated by S&P, the highest obligor concentration is 5%.
Moody’s Investors Service does not rate any transactions in this space.
S&P argues that the deals have an exceptional, if somewhat limited, performance record. In a recent release, the agency said delinquency levels are very low, while past-due leases are “practically nonexistent.”
“None of these transactions has seen downgrades, a reflection of the healthy performance of the securitized pools in addition to their solid credit enhancement,” said Rangel.
S&P has rated 20 deals backed by equipment leases for a total Ps9.5 billion ($778 million). Of the ten outstanding deals now rated by the agency, nine have triple-A national scale ratings.
S&P rated rated five deals amounting to Ps2.7 billion in 2012, a 48% jump from 2011.
In a note from mid-April, analysts at Banorte IXE pointed out that the effect of Fitch’s report on these transactions was so far “difficult to calculate.”
They added, however, that the latest issuances of these transactions have been fully placed, with spreads close to earlier comparable deals.
“This could be attributed to the fact that deals from younger companies rely on more overcollateralization as well as on a structure that prevents potential problems of origination and past-due collateral,” the analysts wrote.
An example of a recently priced deal is one from AB&C Leasing for Ps300 million. With a 45-month maturity, the deal closed March 22, yielding a spread of 160 basis points over the benchmark TIEE rate. The structurer on the deal was i-Structure, a boutique shop active in the sector. i-Structure did not return a request for comment.
Another area of concern for Fitch is a revolving structure when it is paired with originators lacking much of a track record. Deals tend to have revolving periods over 1.5 years and sometimes up to three years. The risk is that a lease originated a year from now might not be as strong an asset than one originated today.
“Down cycles can present unexpected pressure to a new company’s balance sheet, which, in turn, can negatively influence origination policies and corporate priorities and potentially contaminate the revolving loan portfolio,” Fitch said.
Exacerbating this is growth that Fitch sees as being unusually aggressive, with many lenders relying to heavily on securitization.
S&P’s Rangel said that in addition to have performed well historically the structures have triggers to deal with problems in the origination.
“They have portfolio deterioration triggers that would stop the revolving period in case the collateral is deteriorating,” he said. Rangel added that despite strong growth in the sector the agency has not seen underwriting standards weaken.