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Trade tensions don't alter outlook on Kubota equipment ABS

Despite fears of global trade volatility, Kubota Finance Corp. is expected to maintain its historically low ABS loss levels in its next securitization of agricultural, construction and turf-industry equipment loans.

According to presale reports issued Wednesday, Kubota Credit Corp.’s (KCC) $800 million asset-backed transaction is not expected to generate any more losses than the finance company’s previous equipment-loan ABS deal issued in April 2018.

Moody’s Investors Service maintains a low 0.55% lifetime loss expectation for Kubota Credit Owner Trust 2019-1, similar to the prior deal. Fitch Ratings, meanwhile, has actually lowered its base-case loss proxy to 1.15%, from 1.2% for three prior KCC transactions.

The loss derivations were projected based on the historically strong performance – and stellar borrower credit profiles – of the consumer and commercial loan contracts that Kubota has pooled into five prior transactions dating back to 2014.

Neither presale report mentioned ongoing or threatened trade wars between the U.S. and trading partners China, Canada and Mexico, which could result in volatility in prices for agricultural commodities or steel/aluminum supplies for the construction industry.

Last January, trade tensions were cited among reasons for slightly higher loss expectations in an ag-equipment securitization by CNH Industrial Capital America.

Fitch and Moody’s are each assigning preliminary triple-A ratings for three senior-note classes for Kubota 2019-1: a $285.5 million A-2 tranche due June 2022; a $260.5 million A-3 tranche due October 2023 and a $75 million Class A-4 tranche with March 2026 maturity.

The trust’s $179 million money-market tranche in the deal has an expected F1+ rating from Fitch and P-1 from Moody’s.

The notes are supported by 3.5% initial overcollateralization and a 0.5% reserve account.

The $800 million transaction is backed by $949.2 million in balances on 39,235 contracts with remaining balances of $24,200 each. The loans in the pool have weighted average original terms of 59 months, with six months' seasoning.

Moody’s cited a high exposure to construction sector contracts as a risk factor. Those loans make up 31.1% of the pool – higher than the averages from recent deals of other equipment ABS issuers – and have historically performed worse with greater volatility than agricultural loans within equipment ABS pools.

But Kubota’s pools are almost exclusively for small farming equipment (Kubota is a leading manufacturer and distributor of compact tractors, for example) and the contracts are nearly exclusively for new equipment.

Borrowers in the pool have a low weighted average APR of 0.13% - reflecting KCC's prime quality customer base with a WA FICO of 737. (The consumer-loan accounts that derive the FICO score make up 60% of the pool's loan balance.)

Another plus is the contracts all have monthly payment agreements, unlike other ag/construction-equipment securitizations that rely on annual payment schedules. “A higher proportion of monthly pay contracts increases the stability of collateral cash flows, helping to ensure timely repayment of the notes,” according to Moody’s.

JPMorgan and MUFG Securities Americas are the lead underwriters on the transaction.

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