U.S. tariff policy uncertainty and slower economic growth pose increased pressures on equipment ABS transactions backed by trucking collateral, Fitch Ratings says. Fitch’s 2025 outlook for North American equipment assets, including trucking, remains ‘deteriorating’ due to significant headwinds from depressed freight demand, rising goods prices and decreasing consumer demand. While we expect asset performance to deteriorate, trucking ABS ratings remain stable due to robust levels of credit enhancement and transaction structures that provide quick deleveraging.
Trucking equipment ABS transactions are either fully composed of transportation assets or may also contain related “mid-ticket” assets, such as construction and manufacturing equipment.
The trucking sector has faced challenging conditions over the past three years, commonly referred to as the “Great Freight Recession.” These challenges stem from an imbalance between high truck supply (freight capacity) and low freight demand. Trucking spot rates declined to historic lows, putting sustained downward pressure on trucking assets values in ABS transactions. The industry has contracted significantly, marked by layoffs, freight operator closures and bankruptcies at firms such as Yellow Corp, Jack Cooper, Tpine Leasing and KAL Freight. The bankruptcy filings have included lenders and creditors who have historically securitized their loans and leases.
Pressures will persist this year, as higher U.S. tariffs add to ongoing challenges in the trucking and transportation sector. Lower freight volumes and increased layoffs highlight these difficulties. Bankruptcies and closures among smaller trucking operators continue to rise, with companies citing uncertainty and limited financial resources to withstand trade volatility. Fitch expects consumer spending to slow to 2.0% by year-end, which will reduce GDP growth to 1.5% in 2025 from 2.8% in 2024. Heavy equipment ABS asset delinquencies have historically jumped with economic downturns.
Our ‘deteriorating’ asset performance outlook for the equipment ABS sector, first assigned in our December 2024 outlook, reflects growing macroeconomic pressures that negatively impact freight volumes and the recovery values of trucking equipment. We expect delinquency and default levels to keep rising as economic growth slows and unemployment increases.
Despite these challenges, Fitch’s equipment ABS ratings have Stable or Positive Outlooks due to robust ABS structures that mitigate performance deterioration by facilitating rapid growth in credit enhancement. Transactions structures also incorporate excess spread to offset unexpected losses, and most contain an event of default that could trigger rapid principal paydown. Some transactions also have performance-related delinquency and loss triggers that protect rated notes.
Fitch has increased expected losses on ABS transactions when warranted by performance trends. Issuers with diversified, multi-asset type portfolios show stronger performance than those with less diversification, particularly those with significant (50% or greater) exposure to the transportation sector. Some issuers have also shifted their ABS equipment mix to help insulate transactions from the ongoing freight recession.