The market share of equipment ABS is expected to increase in 2023 as the sector grows on investors looking for short duration and low risk paper in a volatile market.
Panellists on Sunday’s equipment ABS session at the Structure Finance Association's Las Vegas conference shared positive sentiments about the future of the sector. They cited enticing features for investors such as liquidity, low risk, short weighted average life and strong collateral.
Equipment ABS was one of the ABS market’s most resilient sectors in terms of volume in 2022. While auto, student loan and other alternative ABS sectors experienced declines in volumes compared to 2021, credit cards and equipment increased.
Total volume for equipment ABS was $22.6bn in 2022 compared to $19.5bn in 2021, $13bn in 2020 and $19.6bn in 2019.
Year-to-date volume for equipment ABS stands at $2.4bn, and panellists Lauren Lannefeld, director of ABS origination at BMO, and Andrew Cantillon, vice-president in ABS banking and finance at Bank of America, said they expect this year's annual volume to reach $20bn-$25bn.
“With interest rates rising so quickly, you start seeing investors coming into [the] space who want short duration, high yield liquid bonds,” Lannefeld said.
Investors are pulling away from triple-B and double-B bonds towards safer, more liquid bonds due to interest rate volatility and credit concerns. This makes investment grade equipment ABS paper, with revenue-generating commercial collateral, more attractive.
Some of the most prominent issuers of equipment ABS do not issue non-investment grade tranches. For example, Deere & Company and Rabobank only issued triple-A rated tranches in their deals earlier this year — a common structure for the companies.
CNH Industrial NV also retained the class ‘B’ notes in its November 2022 deal because it was uneconomical to offer them, according to panellist Wendy Gallian, CNH’s North America head of financial markets.
Gallian said that due to CNH Industrial NV’s position as a programmatic issuer, its bonds generally compete with issuers in the prime auto industry in terms of liquidity in the secondary market.
Bank of America data showed that, at the end of 2022, three-year triple-A fixed rate equipment ABS bonds were trading at 85bp, versus 75bp for three-year triple-A rated fixed rate auto ABS paper.
From a spread perspective, Cantillon said, “there is a slight to sometimes non-existent concession to prime auto ABS, one that reflects perhaps liquidity and volume size as well as the investor universe in auto being slightly bigger than equipment ABS”.