The recently announced merger of American Airlines and US Airways may create new risk for credit card securitizations tied to the airlines' brand, according to two reports published this month by Moody’s Investor Service and Standard & Poor’s.
American Airlines co-branded cards are issued by Citibank and serve as part of the collateral in Citibank Credit Card Master Trust I (CCMTI), and US Airways co-branded cards are issued by Barclays and serve as part of the collateral in Dryrock Issuance Trust (Dryrock).
Although the merger is generally viewed as credit positive for CCIT because it removes the uncertainty about American Airlines ability to continue operation; it’s also likely to bring some changes to borrower behavior that could affect the quality of a securitization's underlying collateral pool and its receivables performance, according to S&P.
Neither airline company has yet outlined what changes they intend to make to their respective frequent flier programs that are ties to the co-branded cards; but a merger between the two programs is likely at some point after the merger between the two airlines has been finalized later this year, according to the Moody’s report.
“An open question is whether or not one of these two banks will ultimately fund that combined program if the merger is approved in the third quarter of this year,” said the Moody’s analysts. “A second open question is what portion of the receivables related to any combined air miles card program will end up in that bank’s credit card securitization vehicle (Citibank’s CCCIT and Barclays’ Dryrock Issuance Trust).”
S&P outlines three possible scenarios, all of which would potentially impact the borrowers’ behavior in a securitization trust. For example, if a consumers, from the discontinued co-branded card, converts to a different card, the receivables would likely remain in the pool but the rewards and terms and conditions are altered and may significantly change the consumers' use and payment patterns.
The co-branded company may could also opt to continue to offer consumers the cards but through a different financial institution. In this case, the accounts and related receivables could be removed from the original trust and sold for fair market value to the acquiring financial institution.
Following the sale and removal of the accounts, if the seller's interest was insufficient under the program documents, the transferor would need to add receivables or deposit funds in the excess funding account to meet the minimum seller's interest.
S&P said that it includes its assessment of the originator's ability to generate and transfer additional receivables in the purchase rate assumptions, which incorporate the rating on the originator where applicable. “A failure to restore the seller's interest to its minimum requirement, would lead to an early amortization event,” explained analysts. “
Under the third scenario outlined by S&P, the credit cards would be discontinued and deactivated for new purchases, and consumers not offered a replacement card from the financial institution.
The related receivables would remain in the pool, but the obligors' payment patterns, under this option, would change significantly because the ability to charge new purchases or benefit from rewards are eliminated.