Niche boutique firm Diversity Capital closed more than $200 million worth of privately placed true and quasi non-rated securitizations last year, illustrating a robust demand for this product on both sides of market.
As previously reported in ASR (see issue 6/11/01), Diversity's equipment leasing and commercial lending issuers are often players in the term and conduit ABS market on a periodic basis. However, these issuers frequently dip into the "spot" market, as David D'Antonio, managing director and founder of Diversity, calls it.
Diversity's niche is financing equipment lease and commercial loan portfolios for private, small and middle-market specialty finance companies, when liquidity is an immediate issue.
The average deal, $2 million to $20 million in size, is similar to a whole loan sale with the servicing retained.
"They can sell a pool of $10 million, $20 million, $30 million every so often to unload some portfolio, and they can do it quickly without high legal costs and oversight, and get more cash out of their deals than if they put it in their conduits," D'Antonio said. "A lot of companies have to do this because they're not getting the right advance rate from their conduits."
These deals typically pay at least 200 over matched term Treasurys, average life. The majority of the market, however, is in the 400 to 600 over Treasurys range, depending on the quality of the assets. The deals generally have three-years and under average lives. "The investors, I would say, receive a very fair yield, compared to an investment-grade rated security."
The pickup in business over the last few years is partly attributable to the larger banks and finance companies shying away from this type of niche funding. For example, GE Capital recently closed its Colonial Pacific unit, while other lenders, including American Express's First Sierra, either pared down related operations or exited the business.
"Last year was a very good year," D'Antonio said. "It was running a little light this quarter, but I think we'll be on par this year with last year."
Though not all the deals are true securitizations or structured through special purpose entities (SPEs), they tend to involve some sort of lockbox, and they include standard segregations of cash, and the covenants and triggers that are found in other true-sale types of structured transactions, D'Antonio said.
"I would say in many cases, the transactions are probably a minimum of investment-grade rating, if you were to have it rated, but we don't do that," he added
Although the firm does involve the rating agencies and surety providers for its conduit deals, of which Diversity placed two last year ($65 million and $75 million).
Diversity is currently working on a $100 million transaction backed by transportation assets, including rolling stock (or trucks), which will be rated and placed in an asset-backed conduit.
Interestingly, the investor base for these deals is primarily regional banks and larger specialty finance lenders. Occasionally Diversity will place a deal with an insurance company.
"We do see a lot of smaller banks, community banks that are looking for product. On one hand, they don't want to lend to a leasing company, but they really want to book the assets, because they see yield, more than they can get on their commercial lending," D'Antonio said. "It's almost a catch-22. They won't lend to the industry, but they do want to book the loans as direct leases."