WASHINGTON -- The tax-exempt market might find municipal vendor leases more attractive if a greater number were pooled and offered as asset-backed securities, according to Standard & Poor's Corp., but investment bankers report obstacles to selling the leases that way.
In a Credit Week Municipal article published Monday, Standard & Poor's analysts Steve Nelli and Tyler Goss endorsed the fledgling market in pooled lease-backed securities as a possible solution to problems that have arisen with attempts to remarket individual vendor leases.
Among the risks cited by the authors with some vendor lease deals are a lack of approval by governmental authorities, weak legal protections for purchasers, and the possibility of default and repossession of the financed equipment because the municipality may view it as dispensable.
In light of these risks and the small size of most vendor deals, many mutual funds have made a policy of refusing to buy individual leases, even though they typically offer high yields derived from the high interest rates charged on small equipment leases, the article says.
"A solution to this marketing dilemma may have been found recently in the form of securitization," say the authors, pointing to a handful of several pooled lease offerings pioneered in recent years by the major leasing corporations.
The first such securitizations occurred in 1990, when Chrysler Financial Corp., GE Capital Inc., and IBM Credit Corp. offered about $500 million of securities backed by vendor leases from their portfolios. GE and IBM followed with several more issues in 1991, all ranging around $100 million.
With an estimated pool of $2 billion to $6 billion a year in vendor lease transactions, analysts had predicted those first offerings would be followed by a steady stream of others.
But so far this year, market participants report only one offering, by U.S. Leasing, a subsidiary of Ford Motor Credit Co., also in the $100 million range.
Investment bankers say the number of such pooled offerings has slowed to a trickle, in part because of their high costs, and because corporations holding large portfolios of vendor leases may not always want to sell them.
At times, corporations may decide to liquidate their portfolios for cash, but that does not occur so regularly or frequently that it can assure a constant stream of securities, said John J. Hallacy, vice president of municipal research for Merrill Lynch & Co.
"We think there will be more deals" as companies occasionally "clean up their balance sheets, but I don't see a flood of them," he said.
Participants in the first deals reported that their insurance, legal, underwriting, and registration fees were much higher than anticipated. Some viewed these as start-up costs that could be scaled down with more frequent offerings.
One lease dealer, who asked not to be identified, said the first deals were handicapped by the market's lack of familiarity with the new kind of security. In some cases, even the investment bankers selling the deals "wanted to make them look like traditional tax-exempt bonds" rather than a new, and possibly even stronger, product, the dealer said.
The difficulties with launching a new asset-backed product were reflected in one corporation's aborted attempt to pool vendor leases. Charles Eden & Co. tried last year to develop a market for the product, but high costs and a lack of business forced the company to give up before the first issuance, analysts said.
Mr. Nelli of Standard & Poor's acknowledged there have been problems getting the market for pooled leases off the ground, not the least of which has been a lack of receptiveness in the market.
In contrast to the corporate bond maret, where asset-backed sales have become routine, "the municipal bond market has not seen broad use of the technique" and it is "just being understood and gaining acceptance," he said.
Once the large municipal bond funds and other buyers become "comfortable" with the technique, demand should pick up, he said.
"I think, going forward over the next three years, bankers will be able to successfully enter this market and package municipal vendor leases," Mr. Nelli said. "The ground has been broken, securitization is growing rapidly in other finance areas, and vendor leases are probably the prime candidates within municipal finance to be turned into securitized portfolios."
While "S&P sees increased securitization" of vendor leases, he added, the technique will never replace the established market for leases that are large enough to sell whole, he said.
"Securitization only makes sense for small vendor leases," he said.