New equipment loans back $863.6 million note issue from Kubota Credit Owner Trust

The Kubota Credit Owner Trust 2024-2 (KCOT 2024-2) transaction is a securitization of fixed rate retail installment contracts secured by new agricultural, construction and turf equipment, sponsored by Kubota Credit Corporation, U.S.A. (KCC). 

The collateralization pool of $1 billion consists of 34,934 contracts. 

KCC originated all the contracts and will also be the transaction’s servicer. KCOT 2024-2 will be KCC’s second term ABS transaction issued in 2024, according to Moody’s Ratings.

KCOT 2024-2 is issuing four classes of notes: $190 million of Class A-1 notes with legal final maturity of July 15, 2025, $270 million of class A-2 notes with maturity date of April 15, 2027, $320 million of class A-3 notes with maturity of November 15, 2028 and $83.6 million of Class A-4 notes, maturing on May 15, 2030.

All the notes have initial reserve of 0.5% and credit enhancement of 4.75%. Overcollateralization is $38.1 million, or 4.25% of total note values. The closing date was June 25, 2024.

Moody’s has assigned P-1 to the Class A-1 notes, and AAA to Classes A-2, A-3 and A-4. Fitch Ratings has assigned F1+ to the class A-1 notes, and AAA to the other classes.

Moody’s lists the transaction’s key credit strengths as obligor credit quality, stable collateral performance, an experienced management team and servicer, obligor diversification, monthly paying contracts, and a strong transaction structure. Key credit challenges include high exposure to the construction and turf sectors, extended term loans and a lack of a backup servicer.

Around 49% of the collateral pool consists of retail installment loans to consumers and 51% of commercial loans. The consumer obligors are of high credit quality as they are generally middle-aged, established homeowners with high incomes. They do not farm as a primary source of income and are not reliant on the health of the U.S. farm economy, Moody’s said. 

The construction obligors do not rely on homebuilding as a primary income source, so they are less tied to the health of the construction sector. Approximately 56% of the pool consists of obligors that have a FICO score and the weighted average FICO score of those obligors is 738 as of April 30, 2024, Moody’s said. 

The 99.98% of contracts for new equipment set KCOT 2024-2 apart from other agricultural and construction equipment ABS that include a portion of contracts secured by used equipment, Moody’s said. New equipment has a higher recovery potential compared to used equipment collateral.

KCOT 2024-2 has a higher loss expectation than KCOT 2024-1 due to a weaker pool composition, with a slightly longer weighted average original term and a higher concentration of turf equipment, Moody’s said. The cumulative net loss expectation also reflects the weaker performance of KCOT’s recent securitizations and KCC’s managed portfolio.