Equipment loan losses rise amid transportation loan deterioration

Annualized net losses for equipment asset-backed securities rose in August across all publicly rated deals as transportation industry portfolios remained under pressure. 

Annualized net losses in Kroll Bond Rating Agency’s (KBRA) Equipment Loan & Lease Index for August rose 26 basis points (bps) month over month and 6 bps year over year, while recovery rates dropped 148 bps MoM and 119 bps YoY. The number of borrowers more than 60 days delinquent fell by 8 bps MoM but rose 39 bps YoY. 

KBRA’s August equipment index includes 106 securitized equipment loan and lease pools with a collective collateral balance of $33.2 billion. One of the key contributors to the declining performance in the all-equipment index, which also features two sub-indices — the small-to-medium-ticket index and the large-ticket index — was the increased trucking collateral defaults, according to the KBRA report. 

The increased trucking collateral defaults come as transportation continues to weather a long-term recession, Sergey Moiseenko, managing director of U.S. ABS ratings for commercial assets at Morningstar DBRS, told Equipment Finance News. 

“Transportation has been in a long two-year-plus recession, which obviously affected portfolios that were exposed to financing trucks, trailers and transportation-related equipment or geared towards the transportation industry,” he said. “We still see delinquencies trending somewhat higher this year in performance, some somewhat deteriorating, but not at the critical level for the majority of issuers where it would feel that systemwide or industrywide concern should be raised.” 

Small-to-medium-ticket index 

In contrast to the all-equipment index, KBRA’s small-to-medium-ticket index — which includes transactions under $500,000 — annualized net losses decreased 8 bps MoM and 2 bps YoY to 1.1%. Delinquencies greater than 60 days on small- to medium-ticket equipment loans and leases decreased 27 bps MoM but rose 43 bps YoY to 1.7%, while the recovery rate rose 232 bps MoM and 867 bps YoY to 30.1% YoY. 

KBRA’s small-to-medium-ticket index contains observations from 42 securitized equipment pools representing $12.5 billion outstanding. The August index securitized pools of light-duty equipment such as office equipment and computers. 

Large-ticket index 

KBRA’s large-ticket index, consisting of transactions over $500,000, largely drove the increased annualized net losses in August for the all-equipment index, with annualized net losses rising 48 bps MoM and 11 bps YoY to 0.71%. 60-plus-days delinquencies increased 6 bps MoM and 37 bps YoY to 1.07%, while the recovery rate fell 942 bps MoM and 1450 bps YoY to 20.6%. 

KBRA’s large-ticket index contains securitized pools of heavy equipment, including agricultural and construction equipment and trucks. The August index contains observations for 60 securitized equipment pools representing $20.7 billion outstanding. 

Now the equipment ABS market prepares for expected Federal Reserve rate cuts on Sept. 18 and the November elections, Moiseenko said. 

“The anticipation is that a lot of investors will close their books before the election time, and then they may just decide to ride the year out and start in the new year, but it’s also going to be driven by how aggressive the Federal Reserve is in cutting rates, which is widely anticipated,” he said. “Let’s say they cut by 1 percentage point, the effect of lower rates and cheaper funding available, and the anticipation of further cuts could stimulate people to go to market earlier, as well as investors to lock in rates while they’re still relatively higher than they are going to be in the future.” 

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