The first deal of the year from equipment leaser CNH, which priced last week featuring the highest concentration of agricultural equipment yet seen from the issuer, also saw a surprise reduction in credit enhancement.

The $1.5 billion transaction, jointly led by Merrill Lynch and Banc of America Securities, was comprised of roughly 74% agricultural and 26% construction collateral and was increased from $1.3 billion.

"CNH has been steadily increasing the amount of agricultural collateral in their deals over the past several years," said Moody's Investors Service analyst Olga Filipenko. "Historically, agricultural equipment has performed better than construction."

Back in 2002, a typical CNH deal was just shy of 70% equipment collateral composition, rising to 71% in early 2003, and had hit 73% by then end of the year, Filipenko said. This pattern is a familiar one. "There is more agricultural collateral in many [equipment issuers'] portfolios; in general, it may be a one, or two, percent increase." Filipenko said.

Meanwhile, credit enhancement levels on the transaction came down to the lowest levels to date for a CNH deal. "The reduced credit enhancement is due to improving losses and delinquencies in the portfolio," Filipenko said.

Total delinquencies as a percentage of the portfolio dropped from 5.61% in 2000 to 3.41% by the end of 2003. Delinquencies have further declined this year to 2.99% as of June 30. Losses as a percentage of the average portfolio outstanding have been on a similar trajectory, falling to .29% as of June 30, 2004 versus .67% for the same period in 2003.

The enhancement levels in terms of subordination and reserve for the most senior classes at close were 75 basis points less than in previous deals. Total hard enhancement for the senior notes is 6.75%, compared to the 7.5% required in prior deals. Credit enhancement for the senior notes includes three percent subordination of the Class B notes and 1.75% subordination of certificates. In addition, a spread account is funded at 2% of the original pool balance, which will grow to 2.5% of current outstandings with a 2% floor of the original pool balance, according to a Moody's presale report.

While this deal was larger than the typical CHN deal, as their sole offering in 2004 it represents a decline in overall volume for the issuer year over year. Last year, CNH tapped the market three times for a total of $2.4 billion. The last offering in 2003 was a $1.1 billion transaction which priced in November via Deutsche Bank Securities and Merrill Lynch.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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