Weak commodity prices are creeping up as a concern in agricultural equipment lease securitizations.
Manufacturer John Deere is prepping its first deal of the year, the $1 billion John Deere Owner Trust 2015. As with prior transactions, it is primarily backed by agricultural equipment, which represent 75% of the collateral. The remaining 25% of collateral are leases on construction equipment.
The deal will issue four tranches of publicly offered class A notes, a money market tranche and three tranches of longer-term notes with a preliminary AAA’ rating from Fitch Ratings. All four classes benefit from initial credit enhancement of 3.5%.
Citigroup Global Markets is the lead underwriter.
While historical losses for agricultural equipment leases have been low, Fitch is concerned that farm income could be negatively impacted if commodity prices remain low for an extended period of time. This risk is exacerbated by the high concentration of agricultural equipment leases in the deal, although the geographic diversity of obligors and diversity of types of agricultural equipment help mitigate this concern.
Nevertheless, Fitch expects cumulative net losses to increase “marginally” from the historic lows of the past few years. John Deere has tapped the securitization market for funding once or twice a year since 2003; its outstanding transactions, which were printed between 2012 and 2014, have experienced cumulative net losses in the range of just 0.01%−0.13% to date.
A marginal increase from the levels of the past three years would not impact the credit performance of latest deal, however. Fitch expects that the class A notes could withstand 5.10% of cumulative net losses under its primary default timing scenario before incurring losses on principal or interest.
Among other concerns Fitch cited in its presale report, JDOT 2015 will issue a single floating-rate class, while the underlying contracts in the pool pay interest at a fixed rate, and there is no interest rate hedge in place to mitigate the risk of rising interest rates.
The collateral backing this latest deal is similar to past John Deere transactions in other respects: the weighted average FICO score of borrowers is 758, versus 759 and 758 in the two deals completed last year. The concentration of the top 20 obligors is also similar to recent deals at 2.14% of the pool.
John Deere’s worst performing securitization was its 2007 transaction, which had a cumulative net loss of 1.28%. While losses in this deal were primarily driven by construction equipment, reflecting the weak real estate market, losses on agricultural equipment leases were also elevated as the result of the inclusion of cotton equipment in the transaction. Cotton collateral has been excluded from deals since 2008, Fitch noted.