1) The equipment ABS market is adjusting to less activity from large players like GE Capital, with smaller independent finance companies accessing the market more frequently through smaller deals. 2) After a slow start in 2016, the second quarter saw increased activity with four ABS deals coming to the market, including a large $787 million deal from MassMutual. 3) While overall issuance volumes are expected to be lower than 2015 due to less activity from large players like GE, ABS continues to provide a viable funding source for equipment loans and leases.

1. 26 • monitor • 2016 MONITOR 100
Finance, a $343 million small-ticket deal from LEAF Commercial
Capital and an $862 million deal from CNH Industrial. This was the
second 2016 transaction for CNH, backed by mid-ticket assets such as
agricultural and construction equipment.
A Changing Landscape
Overall, although Q2/16 issuance volume has picked-up, Merchant
expects end-of-year volumes to be down on a year-over-year basis
when compared with 2015. “GE has exited the market, and issuers such
as Kubota and Dell have yet to bring a deal in 2016,” Merchant notes.
“One of the major drivers for the expected decrease in equipment
ABS issuance volume in 2016 is the exit of GE as a sponsor in the
asset class following the sale of their transportation finance business
to BMO as well as their lending and leasing business to Wells Fargo,”
Merchant says. GE came to market in 2015 with only one transac-
tion, which was via its transportation shelf, versus three transactions
in 2014 — one from each of its three shelves (small-ticket, mid-ticket
and transportation).
Thanks to the growing number of smaller issuers, ABS investors
have developed a greater acceptance of transactions supported by
leases and loans to middle market and small business obligors.
“Historically, small businesses have accounted for the bulk of the
obligor base in small-ticket equipment ABS,” Merchant says. “With
the independent, specialty finance equipment lessors accounting for
a larger percentage of ABS transactions by number of deals relative
to captive finance companies, the underlying obligors are increasingly
concentrated in small- and mid-size businesses, which are the target
borrowers for these originators. In conjunction with some of the more
recent large-ticket transactions, larger rated companies have become
part of the obligor base as seen in deals such as those brought by
MassMutual and Macquarie, in 2015 and 2014, respectively.”
Despite the increase in the number of issuers, Merchant says
captives typically receive strong investor interest and are considered
benchmark issuers in the equipment ABS asset class. “The frequency
of issuance and generally larger size of the transactions improves the
perceived liquidity, which is a driver of investor receptivity,” Merchant
says. “Further, captives are typically publically traded and rated
companies that investors are familiar with.”
While equipment types vary by issuer, depending on the under-
lying originator’s niche, Merchant says equipment type is generally
not a driver of investor interest. He adds that typical equipment ABS
structures are similar across issuers, with senior/sub, sequential pay
transactions accounting for the vast majority of issuance. However,
L
ike many in the equipment finance industry,
the equipment ABS market is adjusting to the
realities of a world without GE Capital. BMO
Capital Markets Director Jeff Merchant sees a shift
as the ABS activity of larger players has tapered off
while small independent companies are accessing the
market more frequently.
The second half of 2015 saw a drop off in ABS
activity. Historically, Merchant says, the equipment
ABS issuance calendar has been front-loaded, but the
changing landscape of the ABS market contributed to
this drop. “Captives accounted for approximately 63%
of issuance in 2015 from a dollar volume perspective.
However approximately 61% of the number of deals
came from independent, specialty finance companies.”
With a growing number of smaller players in the
space, deal size has been shifting as well. “The non-
captives typically issue smaller deals in the $100 million
to $300 million size,” Merchant says. “In addition, vola-
tile financial markets and the ABS spread widening
experienced in the second half of 2015 may have kept
some potential issuers on the sidelines.”
The decline in ABS activity continued into 2016,
which got off to a sluggish start. In the first quarter,
there was approximately $38 billion of issuance volume
versus approximately $54 billion during the same
period in 2015.
So far, the second quarter has been more active,
with four equipment ABS deals coming to market. In
April, Ascentium Capital came to market with a $237
million deal. May has seen three new deals, including
a $787 million large-ticket deal from MassMutual Asset
Rebounding From a Sluggish Start:
TheEvolvingEquipmentABSMarket
BY RITA E. GARWOOD
In an interview with Monitor, BMO Capital Markets Director Jeff Merchant provides an overview of the
equipment ABS market. Though the market has rebounded from a recent drop, volume levels are expected
to be down year-over-year as it evolves due to less activity from larger players.
JEFF MERCHANT
BMO Capital Markets
“One of the major drivers for the expected decrease in
equipment ABS issuance volume in 2016 is the exit of GE
as a sponsor in the asset class following the sale of their
transportation finance business to BMO as well as their
lending and leasing business to Wells Fargo.”

2. 2016 MONITOR 100 • monitor • 27
the market is expecting them to improve to a level of where
they were a year ago,” Merchant says. “They’re improving
from post-crisis wide levels at the beginning of the year to
levels that were still wide of last year, but not as wide as they
were at the beginning of the year.”
Merchant expects increased issuance volume for the
remainder of 2016 as the market stabilizes and the historically
front-loaded issuance calendar partially shifts to the second
half of 2016. “While volumes are expected to be down on a
year-over-year basis, we feel that equipment ABS offers inves-
tors a solid value proposition as it offers a yield pick-up to
the benchmark asset class — prime auto — while featuring
a similar risk profile given the structural and collateral
performance similarities to prime auto ABS,” Merchant says.
“Notwithstanding the broader economy, equipment ABS has
historically performed well.”
If origination volumes do increase, Merchant expects
existing issuers to access the term ABS markets to fund
these assets. “ABS continues to be a viable funding source
for equipment loans and leases as it provides funding
diversification, asset/liability matching and efficient cost
of funds.” m
RITA E. GARWOOD is managing editor of Monitor.
less seasoned issuers typically feature structures with
full turbo amortization as opposed to cash release.
Private Equity
In recent years, private equity investments in equipment
leasing companies expanded the footprint and scope of
the equipment-backed ABS industry. Merchant expects
private equity to continue to be active in the equipment
finance industry with the potential for some platforms
trading in 2016. However, he doesn’t anticipate any new
sponsor-backed start-ups or restarts to enter the equip-
ment finance market in any meaningful way.
“There has been a lot of private equity money coming
into the space post-crisis. The equipment leasing market
is fairly competitive at this point,” Merchant says, adding
that he expects limited new issuers to enter the market
this year. “I’m speaking from a securitization perspec-
tive; there are established platforms out there that may
or may not be a first-time issuer this year.”
Widening Spreads
Regardless of issuer, equipment-backed ABS spreads
have been widening. “Spread widening is expected to be
moderate with tightening expected over the remainder of
2016,” Merchant says. “However, spreads are expected
to remain elevated relative to the levels in 2015.”
Spread widening has been driven by macroeco-
nomic factors as opposed to credit risk factors specific
to equipment ABS. Merchant indicated that while the
market’s tone has improved since early 2016, and mark-
edly in the second quarter, spreads remain wider on a
year-over-year basis.
“Market tone across asset classes has really
improved over the last four to eight weeks,” Merchant
says. “Broadly speaking, ABS deals have been well
received. A lot of them have priced inside of initial price
guidance. Some have even been recently upsized. The
market tone has improved for ABS in general.”
With respect to equipment, Merchant says the tone
has also improved, despite the fact that the recent LEAF
and MassMutual deals priced wide of their issuances in
2015. “Both of those deals priced wider on a year-over
year basis” he explains. “That said, the expectation is
that, for both of these transactions, execution was better
than it would’ve been six to eight weeks ago.”
Merchant expects the market to continue improving
throughout 2016. “There’s a favorable supply demand
dynamic in the market right now whereby issuance
levels are down $20 billion or so year-over-year, so
there’s money from an investor perspective to be put
to work and a lack of supply.”
Despite this positive outlook, Merchant says equip-
ment ABS accounts for a relatively small percentage of
the overall market and is therefore subject to broader
market conditions. “While we do expect spreads to
continue to improve over 2016, I don’t think anyone in
“ABS continues to be a viable funding source for equipment
loans and leases as it provides funding diversification, asset /
liability matching and efficient cost of funds.”
0
Source: Bloomberg as of 5/23/16.
Equipment ABS Issuance by Month
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0
1
2
3
4
5
6
7
Volume($BN)
NumberofDeals
Issuance Volume Number of Deals