U.S. equipment ABS performance has notably improved in 2021 following elevated delinquencies and defaults in 2020, Fitch Ratings says. Overall, payment deferral programs have successfully assisted obligors during the pandemic, followed by strong cure rates with little or no second waves of deferral requests.
Fitch expects performance to continue to strengthen across all equipment asset-based securities (ABS) platforms as the economy reopens. Fitch-rated equipment ABS transactions continue to exhibit low annualized net losses (ANLs) relative to Fitch’s equipment ANL index. ANLs have improved across all equipment types from elevated levels in 2020.
Performance has varied by sector, with small ticket- and transportation-backed transactions experiencing greater spikes in delinquencies and losses and significantly higher levels of payment deferral take rates compared with agriculture- and construction-backed transactions.
Total 60+ day delinquencies spiked during the summer of 2020 and again in early 2021 at just under 1.0 percent. Total ANL peaked in the fall of 2020 at 0.8 percent, driven by weaker asset performance in small ticket equipment-backed transactions. These transactions are generally composed of receivables from small business-owner/lessee obligors, who typically have weaker credit profiles than larger corporate obligors and were hard hit by pandemic-related shutdowns.
Small-ticket delinquency trends have normalized to near pre-crisis levels, with defaults dropping off sharply and remaining low and steady so far this year. However, small-ticket equipment ABS remains susceptible to performance volatility during the current recovery.
The performance of heavy metal equipment ABS, which primarily includes mid- and large-ticket trucking, construction and agricultural equipment, was relatively stable throughout the recession. Delinquency and loss performance improved starting at the end of 2020 after demonstrating some volatility at the height of the pandemic, although not as severe as small-ticket equipment. Recoveries for large-ticket ABS are significantly higher than small-ticket collateral, resulting in more cash flow and lower cumulative net losses.
The transportation sector experienced significant stress during the pandemic due to shelter-in-place policies that resulted in a precipitous decline in over-the-road shipping. As a result, the sector saw record high payment deferral take rates in 2020, ranging from 20 percent to over 40 percent on average in peak pandemic months. Delinquencies and defaults increased slightly following payment deferral expirations, but subsequently declined below pre-pandemic levels.
Early shipping declines were offset by positive trends in e-commerce that increased shipping demand, boosting the transportation sector. This led to cure rates of more than 90 percent in summer 2020, the highest of any equipment ABS sector. There were almost no new deferral requests at YE 2020 and into 2021 in both ABS and managed pools.
In its analysis of equipment ABS transactions during 2020, Fitch adjusted its base case loss proxies by an average of 10bps-20bps following high deferral take rates in the sector and the potential for elevated delinquencies and losses from the pandemic upon expiration of these hardship assistance efforts. However, performance has improved one year on from peak pandemic deferral levels, with low levels of delinquencies and losses, and Fitch has removed the additive pandemic-related stresses and adjusted assumptions to account for strong performance.
Fitch has not taken negative rating action on equipment ABS transactions due to strong loss coverage sized to protect noteholders from performance weakness and robust capital structures that delever quickly. It expects ratings to remain resilient, supported by continued improvement in asset performance, as 100 percent of the Fitch-rated portfolio is on Stable or Positive Outlook.