The Equipment ABS Market

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.

This article: 1) as a matter of background, discusses the basic economics of a TALF loan backed by equipment ABS and provides a general overview of the collateral eligibility requirements of TALF relating to equipment ABS, and 2) discusses the key hurdle highlighted above (i.e., achieving a AAA rating) prospective issuers have encountered, and will likely continue to encounter in the near term under the existing paradigm, in their attempts to structure and execute equipment ABS in the current market.