Fitch Ratings said that losses in small ticket and heavy metal equipment ABS transactions are likely to rise in 2015. Fitch said, in our view, recent all-time lows are unsustainable as originators have begun taking on slightly riskier credits and pricing them accordingly. However, we believe these losses will be minor if the overall economy continues to expand. As a result, asset performance is expected to be stable while rating performance is expected to be stable to positive.

According to the Federal Reserve’s most recent Summary of Commentary on Current Economic Conditions by Federal Reserve District (Beige Book), national economic activity expanded from mid-November through late December. Manufacturing activity expanded in most districts while demand for business credit grew. Credit quality improved overall. Agricultural indicators were mixed. In our view, this has resulted in originations growth and encourages some originators to become more comfortable with taking more risk in exchange for yield.

Fitch does not expect performance metrics to change materially in 2015. However, some sectors may experience slight deterioration including transportation and agriculture. Despite low gas prices, the extremely strong performance within the transportation sector is not sustainable and performance will normalize. Within the agriculture sector, recent declines in commodity prices are negatively impacting farmer income levels.

Through 2013 and 2014, Fitch’s loss indices decreased for both sub-sectors and, in our view, may have reached their floor levels at around 50 bps for small-ticket and 10 bps for heavy metal. They floored at similar levels after the 2001 recession. With annualized net losses at their floors, delinquency levels over the same time frame have risen slightly, but are still within expectations.

While delinquencies have risen slightly, the majority of the small-ticket equipment portfolio delinquencies are in the early stage bucket (30-60 days past due). A significant portion of early-stage delinquencies are typically caused by administrative issues rather than an obligor’s inability to pay. Furthermore, delinquencies at this stage allow servicers ample time to work with the obligor to cure their delinquent obligations.

Following the great recession, Fitch’s delinquency and loss indices saw material improvements due to the higher quality transaction pool compositions and the improving US economy. Additionally, equipment replacement demand increased over the past two years and was buoyed by financially stronger obligors.

Notable sectors include small office, transportation, and agricultural equipment. For both the small ticket and heavy metal indices, total delinquencies (12 month average) reached their lowest levels in late 2012 and early 2013, respectively. Additionally, losses (annualized 12 month average) during this timeframe continued to decrease, indicating that a higher number of borrowers were becoming delinquent but were able to cure their balances prior to charge-off.