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Tariffs present little risk to John Deere ABS performance, says Moody's

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The specter of trade tariff impacts on U.S. farmers remains a distant risk to John Deere Capital Corp.’s securitizations of financed agricultural equipment.

The deal is one of two ag-equipment ABS transactions that have launched into the market for July.

In the new $1.08 billion John Deere Trust 2019-B, Moody’s Investors Service and Fitch Ratings have assigned early triple-A ratings to the term note classes, confident that the deal is structured to withstand even the most extreme loss events the agency models should farmers’ ability to repay loans on tractor and other farm equipment come under duress.

And that includes if China were to maintain a 25% long-term tariff of soybean imports from the U.S., which were imposed last year in response to President Trump’s decision to impose tariffs on more than $200 billion in Chinese good exported to the U.S.

According to a presale report, Moody’s noted that “farm balance sheets, while weakening, still remain strong and we expect global demand and supply for soybeans to remain steady and in balance over the next several years.”

Soybeans, which make up about 10% of all goods the U.S. trades to China, makes a substantial impact on the on the overall trade numbers between the nations, according to Bloomberg. But China has few alternatives to displace its dependence on the U.S. market for soybeans, according to Moody’s.

Even “if the tariffs incentivize China to shift its purchases of soybeans away from the US to other countries, there will not be enough excess capacity in those countries to serve their existing markets, such as the European Union, which will likely shift to importing soybeans from the US,” Moody’s stated. “As a result, we do not anticipate a significant increase in defaults or net losses in agricultural equipment loan portfolios.”

Moody’s and Fitch Ratings have each assigned the provisional triple-A ratings to three classes of notes in John Deer’s second agricultural and construction equipment ABS of 2019. That includes a $340 million Class A-2 tranche with a final legal maturity of May 2022, $340 million in Class A-3 notes due December 2023 and a $84.1 million Class A-4 tranche that isn’t due until May 2026.

A $287 million Class A-1 money-market tranche – accounting for 26.6% of the total notes balance – has Moody’s highest short-term rating of P-1 and Fitch’s F1+ rating.

Moody’s and Fitch have assigned similar ratings to John Deere Capital’s recent transactions, supported by the lender’s lengthy experience in retail securitizations since 1992. The company has had historically low loss levels, despite the high concentration (76%) in one sector (agriculture), and requires only a 3.5% overcollateralization support level to attain the triple-A rating from both agencies.

Fitch has a 1% cumulative net loss proxy assigned to the deal, which pools $1.12 billion in 20,737 outstanding contracts with an average balance of $54,034. The farmers taking out the contracts pay an average APR of 3.2% on loans with original terms averaging 55.04 months – and 11.6 months of seasoning.

The collateral includes has 54.6% new and 45.4% used equipment.

RBC Capital markets is the underwriter.

DLL 2019-2
In a transaction involving “hobby farmer” equipment, Mahinda Finance USA’s $519.03 million ag-equipment ABS is the lender’s first-ever U.S. securitization for retail purchase loans primarily for new small-tractor equipment manufactured by Houston-based Mahindra USA. (Mahindra USA is the distributor for equipment manufactured by various manufacturers as well as Mahindra to about 550 dealers in the U.S.)

According to presale reports from Moody's and S&P Global Ratings, the equipment loans are primarily for lifestyle farmers whose small farms do not entail large-scale production farming that is served by equipment sold by John Deere or CNH Industrial Capital America.

DLL 2019-2 LLC has a similar structure to John Deere’s latest deal with three classes of triple-A rated term notes and a money-market tranche.

The capital stack includes $165 million in Class A-2 notes, $130 million in Class A-3 ntoes and $48.25 million in Class A-4 notes. But Mahindra Finance USA – a joint venture of Rabobank subsidiary De Lage Landen Financial Services Inc. (which owns 51%) and India-based Mahindra & Mahindra Financial Services – has only been underwriting loans since 2011. Its required credit enhancement levels are far higher at 15.6% since in part it lacks as lengthy of a performance history.

The $100 million Class A-1 money-market tranche has preliminary P-1 ratings from Moody's and A-1+ from S&P.

The loans are serviced by DLL Finance LLC, a long-established and wholly owned (but unrated) indirect subsidiary of Rabobank.

The Rabobank subsidiaries have sponsored four previous European securitizations of agricultural equipment lease and loan contracts since 2017.

Annualized net losses for Mahindra Finance USA have been low the past eight years with an average loss percentage of 0.69%, and total delinquencies on loans have “stabilized” at around 3% a year, according to Moody’s.

Unlike the high proportion of annual payment contracts issued by John Deere or fellow ag equipment loan securitizer CNH Industrial Capital America, Mahindra Finance has fully securitized its deal with monthly pay contracts. (The notes will also pay monthly.)

Those loans are extended term loans with average original terms of 80 months and WA remaining terms of 58%; that compared with 59- to 62-month contract lengths for peer lenders and 43-55 months average remaining on the loans’ schedules. The loans are seasoned 22-23 months, according to S&P and Moody’s.

Approximately 23% of the loans are also concentrated in Texas.

Moody’s seasoning-adjusted cumulative net loss expectation is 1.75%. S&P has an estimated CNL range of 3.45%-3.75%.

Credit Suisse is underwriting the DLL transaction.

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Ag lending Equipment ABS