Being creatures of habit, consumers generally follow this hierarchy of debt repayment: mortgages, auto loans, and then credit cards. As if alarmed at subprime mortgage borrowers' acute negligence on what is supposed to be their debt servicing priority, Congress is hard at work on regulations to ensure that consumers make wiser choices regarding their third-most-important obligation.
Despite the general skittishness that government regulations inspire in the financial markets, these proposals did little to undermine recent credit card pricings.
In the Senate, the Permanent Subcommittee on Investigations is holding hearings on the interest rate and fees that credit card issuers charge cardholders. Specifically, the Senate is examining fees charged for universal default, penalty pricing, late fees and over-the-credit limit fees, according to Fitch Ratings. Eventually, credit card issuers might be required to modify the way they charge those fees. Changes in those fee structures might reduce yield and excess spreads in some U.S. credit card securitization deals, but if stringent requirements are implemented, they might not likely have a direct negative effect on collateral or transaction performance in future deals, said the ratings agency.
House Democrats on March 13 introduced legislation that would require credit card companies to give consumers more information about the time it would take to pay off a card balance if they only make the minimum payment, warn of interest cost, and require them to offer information for credit counseling services.
If the Senate eventually succeeds in implementing restrictions on certain interest rates and fees that credit card issuers can charge cardholders, most credit card ABS structures should be able to withstand any shortfalls in excess spread because of collateralization and subordination in their structures, Cynthia Ullrich, a senior director at Fitch, said.
"Also, many credit card structures have a spread account in place," Ullrich said. "If excess spreads decline, the trust begins to trap remaining excess spread into an account, whose funds can be diverted to pay interest in case of a shortfall."
For the time being, the credit card sector continues to reap the rewards of flight-to-quality plays among investors. Citigroup Global Markets' eponymous Credit Card Issuance Trust recently priced a single maturity $2 billion transaction at one basis point tighter than three-month Libor, according to deal documents. The $600 million, three-year American Express Credit Account Master Trust, led by Barclays Capital, priced its triple-A rated tranche flat to the one-month Libor, while its triple-B piece came in at 25 basis points over.
"The last several card deals seem to be pricing well," one market participant said. "The market is not pricing any kind of bad news into that space."
Positive news, it appears, is also doing very little to affect pricing on certain subprime issuances. Last week, the subprime mortgage sector found a liquidity champion, for the time being, in hedge funds.
Nonetheless last Tuesday, the Easi Finance Limited Partnership, led by Bank of America Securities, priced its six-year, single-A rated tranche at 60 basis points over the one-month Libor, while the investment-grade piece came in at 110 basis points over.
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