Fitch Ratings has revised its 2020 asset performance outlook for equipment lease ABS to negative from stable due to the economic effects of the coronavirus. Equipment loan and lease obligors, both large corporate and small commercial businesses, will see reduced profitability and increased pressure on short-term liquidity. This is expected to result in near-term weakening of ABS asset performance and higher near-term delinquencies, with the potential for increased defaults and bankruptcies. The magnitude of softening in asset performance is predicated on the severity and length of the pandemic and the overall effect on the U.S. economy.
However, the US equipment ABS ratings outlook remains stable despite the expected near-term weakening in asset performance. The stable ratings expectation can be attributed to Fitch's conservative transaction base case loss proxies that anchor off the recessionary 2006-2009 vintage and structural features such as quick amortization profiles that result in building credit enhancement levels.
Performance of outstanding 2015-2019 vintage deals has been solid, with losses currently tracking comfortably within expectations.
The potential for continued rising delinquencies leading to further defaults or bankruptcies remains a key credit concern for Fitch. The ongoing economic fallout from the coronavirus has weakened commercial business profitability across most industries nationwide and resulted in a dramatic increase in layoffs and furloughs as businesses try to lessen the blow from the severe economic contraction.
It is actively assessing its rated portfolio totaling $19.5 billion of outstanding notes, composed of 52 transactions and 212 classes. Of these 212 ratings, 160 are ‘F1+sf/AAAsf’, 22 ‘AAsf’, two ‘A+sf’, 17 ‘Asf’, one ‘BBB+sf’, nine ‘BBBsf’, and one ‘BBsf’. Fitch’s updated assumptions about the spread of the coronavirus and the economic impact of the related containment measures are incorporated in its analysis. See graphic here.
As a base case scenario, Fitch assumes a global recession in first-half 2020 driven by sharp economic contractions in major economies with a rapid spike in unemployment, followed by a recovery that begins in third-quarter 2020 as the health crisis subsides. This coronavirus base case is being used for new and existing transaction analysis and reviews and may result in prior recessionary 2006-2009 vintages being more heavily weighted when deriving loss proxies. As a downside (sensitivity) scenario, Fitch considers a more severe and prolonged period of stress with a halting recovery beginning in second-quarter 2021.
Small-ticket equipment ABS portfolios are most susceptible during an economic recession as the credit profile of these small business owners is weaker relative to larger corporate entities in terms of depth of funding and liquidity. Additionally, federal aid to small businesses has not been rapidly deployed and may be insufficient to address widespread need. Pools backed by construction-related obligors may be more pressured as new projects may be delayed until the economy recovers.
The performance of equipment ABS transactions backed by agriculture loans/leases was depressed since 2014, only stabilizing in 2018, with performance further pressured in 2019 by poor weather in the spring and trade pressures. Fitch expects the recession to negatively affect farmers’ balance sheets, potentially resulting in delays in agricultural equipment loan and lease payments.
In the near term, over-the-road shipping demand is expected to continue to increase because of the seismic shift to online shopping due to shelter in place and social distancing policies that have benefited the transportation sector. However, should the recession be more severe or prolonged, Fitch expects that transportation performance will weaken as it did in the last recession.
While the federal government is providing stimulus support to businesses nationwide, the amount and timing of the aid continues to evolve. The majority of equipment servicers are providing assistance programs and increased flexibility to struggling businesses, such as extensions of contracts on the back-end of their loan or lease, which will help limit the increase in delinquencies in the near term. Based on recent conversations with servicers, there appears to be minimal disruption in operational capabilities, despite collection staff working remotely.