The credit quality of US equipment asset-backed securities (ABS) transactions will remain strong in the coming year, owing to the continued financial stability of the underlying obligors and growth in the macroeconomy, Moody's Investors Service says in its 2018 outlook for US equipment ABS. Despite recent weakness in the agricultural sector, overall delinquencies and losses will remain near historical averages.

"Strong farm balance sheets, a slight uptick in net farm income and continued strength in the construction sector will minimize defaults and delinquencies in ABS backed by agricultural and construction equipment contracts in 2018," says Moody's analyst, Andrew Miller. "Used equipment prices may however weaken if farmers return leased equipment next year, as this would lead to oversupply and lower recoveries on defaulted loans in newer deals."

Meanwhile, economic expansion and a robust manufacturing sector will continue to drive demand for freight services, Miller says. Together these factors will ensure the strong performance of new transportation ABS and improve the performance of outstanding transactions. Losses in next year's deals likely will be lower than those in deals that closed in 2015-16, when the trucking industry was underperforming and in 2017, when it began to recover from the downturn.

The credit performance of small-ticket leases and loans in new deals will be slightly weaker than in existing ones in 2018, though will remain strong overall, Moody's says. As the economy grows and entrepreneurial activity remains high, losses are likely to increase only slightly if equipment finance companies ease underwriting standards in an effort to sustain their growth amid rising competition, with the strong economy buffering collateral pools from major losses.

Moody's expects issuance of agricultural equipment ABS to go up next year, given the entry of at least one new issuer into the market. At the same time, demand for new fuel-efficient trucks is likely to boost issuance of transportation equipment ABS. Issuance of small-ticket equipment ABS is however likely to fall on the back of industry consolidation.