Weekly Wrap: Subprime card issuer breaks ice on 2021 credit-card ABS

March 5, 2021 8:31 AM

Mercury Financial is breaking the ice on the 2021 credit-card ABS market with a first-time, $750 million securitization of non-prime and subprime MasterCard account receivables.

Mercury Financial Credit Card Master Trust (MFCCMT) Series 2021-1 is the initial public issuance of asset-backed securities by Austin, Tex.-based Mercury, according to a presale report issued by Kroll Bond Rating Agency.

The notes are secured by receivables from a pool of $1.2 billion in credit-card account balances serviced by Mercury. Approximately 84% of the accounts in the collateral are legacy Barclaycard accounts that Mercury (then operating as Credit Shop) acquired in March 2017 when it absorbed $1.6 billion in subprime credit-card balances from Barclays’ former U.S. card business.

Mercury has been issuing its own cards since 2019, but most of the outstanding balances it services in its mortgage portfolio are the legacy accounts (totaling $1 billion, as of December 2020, according to Kroll).

The accounts are subprime with average borrower FICO score of 668 in the transaction. But the 711,293 accounts included as collateral belong mostly to millennials (average age range of 20-30) who earn between $50,000 and $75,000 a year and actively use 2-5 credit cards, according to a report from Kroll Bond Rating Agency.

Their credit lines are between $3,000 and $5,000, with utilization rates in excess of 60%. By comparison, average credit limits are $9,500 and utilization rates around 11% in prime card ABS pools sponsored by the "Big Six" bank-card trusts (Capital One, Bank of America, Citi, Chase, Discover and American Express), according to Moody's Investors Service.

While Mercury manages the cardholder accounts, it lacks a bank charter and uses South Dakota-chartered First Bank & Trust to originate and hold the accounts on its books.

Mercury, founded in 2013 (aided by with an investment from Chinese social media firm Renren), was itself acquired by Värde Partners in November 2017.

The Series 2021-1 issuance from the master trust will feature four classes of notes. A $526.97 million tranche of Class A notes has a preliminary A rating from Kroll; the Class B (BBB) and Class C (BB) are each sized at 88.8 million, while a subordinate Class D tranche (B) totals $45.4 million.

Kroll estimates Mercury will have a gross total yield of 17.38% from the notes issuance, after applying the average coupon (3.03%) and 2% servicing fees.

The transaction will have a two-year, non-amortizing revolving period for Mercury to add new accounts to the pool, with no concentration limits.

While the issuance is Mercury’s first public ABS issuance, it has previously completed private placements – including its most credit CreditShop Credit Card Co. 2019-1 deal for which notes will be redeemed from the MFCCMT 2021-1 proceeds.

The only other bank-card ABS transaction this was the NewDay Funding Master Issuer Plc issued In January. While secured by credit-card accounts held by UK cardholders, it included one U.S.-dollar-denominated tranche of notes for North American investors.

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In other news this week:

CMBS delinquency rate plunges in February

Data research firm Trepp this week reported an eighth consecutive month of declining CMBS loan delinquencies.

According to the Trepp, the CMBS delinquency rate for February was 6.8%, a decline of 78 basis points from January. Trepp noted it was the largest month-to-month decline over the last eight months, as well.

The percentage of loans that were overdue 30 days or more was 0.58%, down 16 basis points for the month. Of loans in a grace period, borrowers of 2.3% of CMBS loans by balance missed payments in February, a 0.77% declien from January. (All of those loans were still less than 30-days delinquent).

Loans with special servicers dipped to a 9.6% share of tracked CMBS loans in February, compared to 9.72% in January.

Of note, Trepp pointed out that the percentage of lodging and retail loans in special-servicing fell in February. For lodging, the 24.2% special-servicing rate was down from 24.2% the month prior. About 16.7% of retail loans in special servicing was down from 17.1% in January.

SLABS delinquencies rise amid expiring COVID-19 relief

Loans held in private student loan assset-backed securites (SLABS) saw an increase in delinquencies in the fourth quarter of 2020, as more borrowers transitioned out of expiring pandemic-related debt relief programs from lenders and the government, according to DBRS Morningstar.

In in quarterly updte report on ABS performance in the private SLABS sector, DBRS Morningstar reported increases in privately originated student-loan pools, refinanced loan pools, as well as loans that were issued under the defunct Federal Family Education Loan Program.

Delinquencies had been declining in the second and third quarters, coinciding "with borrowers receiving coronavirus-related forbearances," the report stated.

For FFELP loans, DBRS Morningstar noted that "following a sharp decline in Q2 2020 and Q3 2020, FFELP ABS delinquencies increased significantly in Q4 2020 as borrowers continued to transition out of forbearance."

The 8.6% delinquency rate was up from 5.5% in the third quarter, but it a decrease from the 9.3% average in the fourth quarter of 2019. Sixty-plus day delinquencies were up to 5.5% from 3.1%.

Sixty-plus day delinquencies for privately originated student loans rose to 2% from 1.6% in the third quarter.

Meanwhile, private refinanced SLABS pools, which include accounts originated by lenders such as SoFi and Commonbond that target high-earning, advanced-degree professionals, had delinquencies up in both the 30-day (0.19%) and 60-day (.09%) buckets.

"While there has been some momentum in the increase of early-stage delinquencies (30+ days past due) over time, this is not a concern as delinquencies remain extremely low and are well below DBRS Morningstar expectations," the report noted on the refi SLABS pools.

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Wall Street Frets Over A Revived CFPB Trump Left Toothless

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CFPB officially proposes delay of QM changes

The Consumer Financial Protection Bureau made official the agency's plans to delay the compliance deadline for changes to its main mortgage underwriting rule.

Acting CFPB Director Dave Uejio on Wednesday issued a notice of proposed rulemaking extending the compliance date from July to October 2022 for changes to the Qualified Mortgage rule. The CFPB said the delay, which the agency first announced last week, was needed “to ensure homeowners struggling with the financial impacts of the COVID-19 pandemic have the options they need.”

The original QM rule requires loans to maintain a debt-to-income ratio of no more than 43%, though mortgages backed by Fannie Mae and Freddie Mac are exempt under a temporary 2014 provision.

That exemption is slated to go away whenever the CFPB implements the overhaul that was finalized by then-Director Kathy Kraninger in December. The changes, which were set to take effect in July, include replacing the DTI limit with a standard based on the loan's price, and subjecting Fannie and Freddie to the same framework as other companies.

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Large caravan site holiday or residential lodges.

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Cascade's manufactured-home MBS deal puts focus on new originations

Cascade Financial Services is sponsoring its first rated transaction of manufactured-home (MH) loan contracts, a rare and historically riskier asset class in residential mortgage-backed securities.

According to a presale report issued by Fitch Ratings, Cascade will market $162.7 million in bonds backed by 1,889 MH loans, of which most are secured by chattel properties (or structure-only loans that do not include land as collateral).

The deal is the third post-crisis manufactured-housing securitization rated by Fitch, following deals in 2019 and2020 that were sponsored by FirstKey Mortgage. But it is the first deal to primarily focus on new-origination contracts, with average seasoning of just 12 months, Fitch noted.

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Libor moves to its ‘final chapter’ as U.K. sets end dates

U.K. regulators kicked off the final countdown for Libor, ordering banks to be ready for the end date of a much maligned benchmark that’s been at the heart of the international financial system for decades.

The U.K. Financial Conduct Authority confirmed Friday that the final readings for most rates will take place at end of this year, with just a few key dollar tenors set to linger for a further 18 months.

The potential delay in the most-used dollar Libor tenors – notably the three-month benchmark, utilized in outstanding U.S. collateralized loan obligations – is a concession to market concerns, but regulators remain adamant that dollar Libor shouldn’t be used for new contracts after 2021. Firms should expect further engagement from their supervisors to ensure timelines are met, the FCA warned.

The move comes in the wake of major manipulation scandals and the drying up of trading data used to inform the rates, which are linked to everything from credit cards to leveraged loans. Regulators have made a concerted effort to wind it down in 2021, with the Federal Reserve and others pushing market participants toward alternatives.

“Outside the U.S. dollar markets, this marks the end game,” said Claude Brown, a partner at Reed Smith LLP in London. “The rate that linked the world, and then shocked the world, will leave this world in 2021.”

Libor is deeply embedded in financial markets. Some $200 trillion of derivatives are tied to the U.S. dollar benchmark alone and most major global banks will spend more than $100 million preparing for the switch. Smaller players -- from hedge funds to non-financial corporates -- could also be caught in the crossfire, with many only at the beginning of the transition from legacy contracts.

Bank of England Governor Andrew Bailey said this was now the “final chapter,” and there’s no excuse for delays. “With limited time remaining, my message to firms is clear – act now and complete your transition,” he said.

Progress toward replacement benchmarks, such as the Secured Overnight Financing Rate in the U.S. and the Tokyo Overnight Average Rate in Japan, has been sluggish, and there are hopes Friday’s announcement could accelerate the process.

“This was the much anticipated final piece of clarity the market needed to really kick on,” said Kari Hallgrimsson, co-head of EMEA rates at JPMorgan Chase & Co. “We would expect liquidity for trading the new rates to keep increasing from here on out.”

Bloomberg