Moody's, a leading credit rating agency, has upgraded four subordinate asset-backed securities (ABS) from GE Equipment Transportation LLC, the debt issuing entity of General Electric Company’s (GE - Analyst Report) General Electric Capital Corporation (GECC). In addition to upgrading Series 2012-2 and Series 2013-1, Moody's also affirmed the senior securities of these transactions. The upgrade will affect approximately $954 million worth of ABS. The transactions are securitizations of transportation equipment loans and leases originated and serviced by GECC.
ABS are financial instruments backed by a pledge of the issuing entity’s assets, typically issued in classes of declining seniority. In the GE Equipment Transportation LLC, Series 2012-2 and Series 2013-1 issues, the underlying collateral pool of assets primarily comprise equipment loans and security interests in the related transportation equipment. The ratings of the notes address their credit quality and signify the likelihood of the timely repayment of interest and the ultimate payment of principal pursuant to their terms.
GE Equipment Transportation LLC issued six classes of securities under both Series 2012-2 and Series 2013-1. Moody’s affirmed the Aaa ratings held by the senior securities belonging to Class A-2, A-3 and A-4 of both the issues, which is the rating awarded to the securities of the highest quality with the lowest level of credit risk. Moody’s upgraded the rating for subordinate securities belonging to Class B and C of the Series 2012-2 issue to Aaa due to low credit risk. For Series 2013-1, Class B securities were upgraded to Aaa from Aa1, and Class C securities were upgraded to Aa1 from Aa3.
Reasons for Upgrade
The upgrades were prompted by a reduction in lifetime net loss expectations for the underlying collateral pools as a result of better-than-expected performance. Moody's expects the collateral pools to incur lifetime cumulative net losses of 1.00% of initial pool balance, compared to prior expectations of 1.75% and 1.50% on the 2012-2 and the 2013-1 issues, respectively.
In order to improve the credit quality and subsequent ratings assigned to the notes, issuers often use credit enhancements. Credit enhancements available to these securities, other than subordination, include overcollateralization (OC), non-declining reserve accounts and excess spread. Every month, half of the excess cash available to release to the issuer is applied to build the OC, which provides further support to the securities.
The upgrade might also have been influenced by a stable recovery in the U.S. macroeconomic environment. Going forward, the transportation and construction markets, being major drivers of performance of the collateral, look set to benefit from increased economic activity, low interest rates and steady job growth.
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