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The Equipment ABS Market
It is without question that, over the last decade, securitization has played a pivotal role in the availability of credit to companies in the equipment leasing and finance sector. As investors shunned the structured product markets in 2008, liquidity disappeared and new ABS issuance dried up. This phenomenon was due to, among other things, re-pricing of risk, credit quality concerns related to the underlying exposures, questioned viability of originators/servicers, and the negative public perception (be it correct or incorrect) of any association with “structured” products. Finance companies became unable to access a traditionally inexpensive and ample source of funds which, in turn, constricted their ability not only to meet the capital needs of their existing customers, but also to grow their customer base. As a result, it became increasingly necessary for those companies to curtail financing activities and utilize other sources of available funding, such as working capital lines, revolving credit facilities, non-term securitization facilities and “one-off” partial or non-recourse transactions at a time when those same credit providers were under balance sheet pressures and seeking to reduce or eliminate exposures ' particularly to middle-market credits.
It is this disruption in the ultimate availability of liquidity to customers of specialty finance companies that the Federal Reserve sought to remedy with its announcement and subsequent implementation of the Term Asset-Backed Securities Loan Facility (“TALF” or the “Facility”) and the inclusion of certain equipment ABS as eligible collateral thereunder. Without doubt, the initial availability, through TALF, of quality levered returns with substantially limited downside has played a role in resuscitating the ABS market. Up to and including September 2009, more than 60 TALF-eligible transactions have come to market. Although these are certainly encouraging statistics, significant hurdles still remain for many equipment lessors seeking to access the term ABS markets. Although the investor base for the AAA classes of TALF-eligible ABS and ABS generally continues to expand from a handful of traditional buyers, such as large money managers and a number of bespoke TALF-specific investment funds, investor demand for subordinate tranches remains soft. As few prospective issuers in the equipment sector have been able to achieve the required AAA rating on their senior bonds, the term ABS market remains effectively closed to all but a handful of these issuers.
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