The year ahead for the equipment asset backed securities industry will be one of modest growth, with 2003’s total issuance predicted at $9.3 billion over 2002’s $7.3 billion. Public issuance volume will return to its 2001 level of approximately $6.9 billion and 144A private issuance is expected to increase to approximately $2.4 billion, Moody’s Investors Services says in a new report.
Most of 2003’s public issuance growth will be generated through larger issuance volume and through a return of some issuers who did not participate in 2002’s market. The increase in the private sector will come from modest volume growth and from the addition of new issuer names.
The year 2002 was a challenging one for the equipment finance industry as the weak economic environment inhibited industrial equipment spending in many sectors and as new lease origination volume declined. Consequently, total issuance, compared with that of 2001, declined: public by more than 23%, to $5.2 billion, and private (144A) approximately 41%, to $2.1 billion.
“Weak economic conditions, which hampered lease origination activity and caused bankruptcies and exits from the industry were the main causes of volume decrease,” says Irina Faynzilberg, co-author of the report. She adds that “mergers and acquisitions from the past gave some smaller players access to alternative sources of funding, which eliminated or reduced their reliance on securitization.”
“Moody’s expects to see an increase in the securitization of marine container leases in 2003. Purchases of new containers slowed down in 2002 with the sluggish economy but more normalized buying activity is anticipated this year,” says co-author Barbara Havlicek. As a result, volume is likely to increase as repeat issuers securitize more recent originations and as a number of smaller players may attempt to access the market as an alternative to traditional corporate lending.”
The analysts say that if the economy does not rebound in 2003, the sector will continue to be challenged by economic pressures and by reduced levels of investment in industrial equipment. Additional casualties and exits from the industry may be part of the scene, particularly among those without sufficient sources of liquidity. Deteriorating asset quality may further reduce profitability or shut some companies out of the capital markets.
Senior Credit Officer Denise Person, a co-author, says “to counteract the effects of a weak economy, we expect the successful players to continue improving their operations by tightening underwriting standards, by increasing collections staff, and by curtailing growth. The surviving players should emerge from this period with a more robust and efficient business model.”
The report is titled “2002 Review and 2003 Outlook: Equipment Asset Backed Securities Industry Copes with Challenging Economy.”