Prior to the downturn in the market that began in mid 2007, the volume of securitization of equipment leases increased steadily in 2006 and the first half of 2007 due to its flexibility and usefulness as a corporate financing tool. Leases, once considered a new asset class, have been accepted in the mainstream of asset classes and have now been securitized in many forms. For the past decade, a wide variety of equipment leases have been securitized, including leases of office equipment, computers (both personal and mainframe computers), medical equipment, telecom equipment, dental equipment, beauty parlor equipment, railcars, exercise equipment, video equipment and data processing equipment.

Outside of the equipment lease sector, automobile leases, truck leases, motorcycle leases, recreational vehicle leases, cell tower leases and heavy machinery leases have, until most recently, been readily securitized.

Over the past decade, the three main categories of lessors have generally been banks, captive finance companies (such as Caterpillar and John Deere) and independents (such as CIT Group, Inc. and General Electric Capital Corporation). In the past, of these three categories, banks have traditionally been dominant in securitizing but, because of recent consolidations, banks have been losing market share. Recently, of these three major categories, independent lessors, largely because of their balance sheet orientation, have been the most likely to securitize.

In the period beginning with the first quarter of 2002, issuances of securities backed by equipment lease receivables had dropped off due to a number of factors, including a general downturn in the post - September 11 economy and, more to the point, a plethora of consolidations among lessors and buy-outs of equipment originators by larger entities that, for various reasons (such as lower cost of funds), did not pursue securitization as a financing vehicle. Yet, due to enhanced liquidity in the market and a variety of other factors, lease-backed issuances gradually escalated in the period from late 2003 through the beginning of 2007. During that period, additional funding sources, such as hedge funds and private equity funds, had emerged as reliable purchasers of lease-backed securities.

The fundamentals of the equipment leasing industry continued to exhibit strength throughout 2006 and early 2007, until the prevailing general asset-backed market slowdown. In terms of lease originations, the most activity during 2006 and early 2007 had been in small-ticket and micro-ticket leasing. Aircraft leasing had been increasingly active since the fourth quarter of 2005. During that period, there had been a good deal of growth in securitizations backed by large portfolios of diversified aircraft leases, as well as for specific innovative transactions backed by particular assets such as aircraft spare parts or engines. Moreover, international regulatory agreements enacted in the past few years had lured additional European aircraft investors into the market. Some have predicted that the next wave of airline mergers could result in a plethora of new deals and lead to a turnaround in lease-backed issuances. The telecom and high-tech equipment sectors which had lagged throughout 2004, rebounded in the second quarter of 2006 and continued to thrive until the general market slowdown in the fall of 2007. The devastation caused by the 2005 hurricanes as well as the prolific construction engendered by the 2005 federal highway legislation continued to generate an increase in truck leasing as well as in heavy equipment loan and leasing originations through 2006 and into 2007. Since mid 2007, the general malaise overhanging the structured finance market generally has infected the leasing sector and, not surprisingly, the volume of transactions has plummeted dramatically. Yet, the slow down in deal issuance is not indicative of any deficiency in the fundamentals underlying the lease securitization paradigm nor of a loss of confidence in the structure of the typical transaction. The declining interest rate environment may be conducive to lease originations and may catalyze a resurgence in the volume of lease-backed securities.

The purpose of this article is to discuss some recent trends in equipment lease securitizations, not withstanding the current turbulence overhanging the market, and to discuss the benefits to, and challenges for, an originator considering the securitization of equipment lease receivables in a changing regulatory environment.

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