Trade woes could impact CNH ag equipment contracts, says S&P

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Near-term volatility in global trade – adding potential long-term worries in commodities – is adding stress to CNH Industrial Capital America’s planned $786 million agricultural and construction-equipment loan securitization.

Presale reports published Thursday noted that trade tensions over tariffs and agricultural products could contribute to potential woes for farm borrowers paying on heavy equipment retail sales contracts issued and serviced by the U.S. arm of the global ag industry lender.

As a result, S&P Global Ratings expects losses over the life of the deal to be in the range of 1.65%-1.9%; slightly higher than the 1.55%-1.8% range of the lender’s most recent asset-backed deal rated by the agency (CNH 2018-A).

“Agricultural commodity prices were volatile in 2018, primarily due to trade conflicts between the U.S. and China,” S&P’s report stated. “Our outlook is for continued volatility in agricultural commodity prices.”

S&P also pointed to potential problems for borrowers in the construction industry, based on steel industry tariffs and the Trump administration's hard-line immigration policy impacting labor. But construction loans make up a smaller portion (13%) of the CNH 2019-A pool compared to predominant share of ag-industry loans in CNH's first asset-backed portfolio of 2019.

Moody’s Investors Service did not raise loss projections, despite concerns over the impact of 25% Chinese trade tariffs on U.S. soybean imports. Moody’s has left unchanged the 1% cumulative net loss expectation from prior CNH deals it has rated, citing the "strong" balance sheets of U.S. farm operations. Moody's also doesn't believe U.S. soybean farmers will face future displacement in the market, since China will be unable to fulfill capacity from other markets long term.

Moody's 1% loss rate was also included in its forecast for last September’s $810 million CNH 2018-B transaction.

Any rise in delinquencies or losses would not be new for CNH and other ag-equipment lenders including DLL Finance, AGCO Finance and John Deere Credit. ABS issuers in the farming industry have seen rising loss rates since 2014, which was the end of a 14-year period where losses and delinquencies “hovered” at historically low levels for securitized portfolios, S&P noted.

“Although cumulative net losses have been elevated for the 2015 and 2016 vintage transactions, we expect the performance of recent vintages would return to normalized levels."

Furthermore, CNH has a proven long-term history of “prudent” underwriting and servicing a unique lending sector featuring long-term contracts frequently depending on once-a-year payment schedules, the agencies noted.

Both Moody’s and S&P have assigned preliminary triple-A ratings to three classes of senior term notes in the transaction. A Class A-2 tranche due May 2022 is sized at $252 million with a coupon of 3.17%, as is a Class A-3 notes offering due April 2024 paying 3.2%. A Class A-4 tranche totaling $75.35 million has a 3.41% coupon for a January 2026 maturity.

Also included is a money-market tranche totaling $189 million, with a coupon of 2.84%. They are rated P-1 by Moody’s and A-1+ by S&P.

A single Class B subordinate class of $17.7 million in notes is priced at 3.61%, according to Moody’s.

The senior notes benefit from 4.5% credit enhancement, a level unchanged from CNH’s 2018 transactions. The CE includes a 2.25% reserve account; additional support will be derived from expected excess spread of 3.16%.

The collateral consists of 18,097 retail installment sales contracts with outstanding balances of $871 million, originated by CNH Industrial Capital America, a U.S. subsidiary of global giant CNH Industrial N.V. They average $48,141 each with weighted-average adjusted APRs of 3.82% and original terms of 62.3 months.

The contracts are seasoned an average of 7 months and are nearly evenly split between new (50.1%) and used (49.9%) equipment.

The loans are serviced in-house by an indirect CNH subsidiary, New Holland Credit Co.

CNH Industrial Capital was the second largest issuer of agricultural/construction equipment loan securitizations in 2018. CNH sponsored two deals valued at $1.59 billion, trailing Deere & Co.’s $1.61 billion in asset-backed securities volume in a pair of offerings last year.

CNH also sponsors a master trust that issues notes for proceeds to finance dealer inventories, although no series have been issued since 2013.

The new deal was underwritten by Bank of America Merrill Lynch.

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