North Mill Equipment Finance, Series 2022-B, is preparing to issue about $353.1 million in asset-backed securities (ABS), secured by contracts on transportation, medical and construction equipment.
Known as NMEF Funding 2022-B, the deal is North Mill's sixth transaction secured by similar collateral that Moody's Investors Service plans to rate.
Truist Securities is lead underwriter on the deal, for which North Mill Equipment Finance is acting as sponsor and servicer, according to Moody's. Kroll Bond Rating Agency also cited Deutsche Bank Securities as an initial note purchaser. Also, the deal will repay notes through a sequential pay structure.
As for credit enhancement, the deal uses several forms, including subordination—except in the case of the class-C notes. The notes also benefit from 12.6% overcollateralization of the initial adjusted discounted pool balance. Further, the notes in NMEF Funding 2022-B will have 12.6% overcollateralization of the initial discounted pool balance. The deal will also accumulate excess spread to a target of 20.5% of the outstanding adjusted discounted pool balance.
Further, Moody's also expects that the sequential-pay structure and non-declining reserve account will result in a buildup of credit enhancement supporting the rated notes.
Moody's also considered North Mill's manual, detailed underwriting process—carried out by a credit analyst—to be another potential credit boost. Small businesses, which have a weighted average (WA) 7.9 years in business, and which have established credit and operating histories, make up the bulk of obligors, according to Moody's. They are typically borrowing to furnish their businesses with essential equipment, Moody's said.
"Maintaining access to this equipment is typically important enough to the obligors' operations that they will prioritize payments on the contract over other expenses, including secured debt," the rating agency said.
Moody's also credits the pool's granular nature. The collateral pool contains 2,323 contracts with an average balance of $114,900. The top obligor accounts for 0.40% of the pool, while the top five make up 1.86% of the statistical discounted contract balance, as of the cutoff date.
Yet Moody's did raise a number of potential credit challenges. For one, North Mill is a small and unrated sponsor and servicer, and Moody's notes that payment risk disruption increases. To mitigate this risk, the rating agency notes, North Mill has a backup servicing agreement in place with GreatAmerica Portfolio Services Group.
Moody's expects to assign ratings of 'Aaa' to the $216.1 million, A-2 notes; 'Aa3' on the $36.3 million, B notes and "Baa1' on the $32.3 million, class C notes, but will not rate the class A-1 notes.
KBRA says that it expects to assign a 'K1+' rating to the $67.2 million, class A-1 notes. Otherwise, KBRA intends to assign ratings of 'AAA' through 'BBB' to the class A-2 through class C notes.
