Though investors breathed a sigh of relief after J.P. Morgan Chase announced it would amend the Chase Credit Card Master Trust, Morgan Stanley researchers theorize that the chance of an early payout still exists, due to the C class reserve accounts that may trap excess spread away from the high-coupon fixed-rate series.
In late April, Chase moved to amend its master trust to allow for shared excess spread bolstering the 1996-3, 1999-3 and 1996-2 series that have periodically come close to triggering an early amortization. The move was met with applause - the issuer was viewed as sticking its neck out for investors at a time when such activity could be considered "implicit recourse," and threaten the entire trust's off-balance-sheet status.
Meanwhile, solicitation materials for bondholders to vote on the amendment were due out late last week, confirmed Rocco Adrian at CHAMT proxy agent Mellon Investor Services LLC. At least 50% of bondholders must approve the amendment, which presumably has received Securities & Exchange Commission approval, sources said.
While others agree that there is an outside shot the floating-rate series could breach the reserve account triggers, some analysts remain skeptical over the likelihood of such an event, as the length and magnitude of the decline in excess spread needed for a cash diversion is significant.
Meanwhile, Amol Prasad, credit card strategist in Morgan Stanley's fixed-income strategy group, theorizes that while the amendment does provide some added cushion from a trigger, it only adds an additional 60 basis points of spread protection to fixed-rate CHAMT holders, given current performance. Of course, without the amendment, at least one of the fixed-rate series is a bad month away from a base-rate payout.
Prasad's basis assumption is that excess spread declines roughly 60 basis points in June and remains constant through July. If this were to occur, excess spread for all of the floating rate transactions would come in between 4.37% and 4.50% - the latter being the trigger for floating-rate C classes to fund the respective reserve funds to a target of 1.5% of principal balance.
Prasad's analysis points to the fact that, with three-month excess spread for the aforementioned 1996-3 transaction currently averaging 0.33%, a June figure of negative 0.96% would lead to a three-month excess spread of negative 0.24%, but early amortization would be prevented by the shared excess spread. Were it to remain constant into the July reporting period, however, Prasad fears that the floating-rate series, with first priority to any excess interest, would prevent the amendment's ability to bolster the fixed-rate series.
"We believe that the floating-rate series may not have any shareable excess spread," writes Prasad in last week's research, entitled "Holes in Chase Amendment?" "Thus, depending on the status of the other reserve accounts, (fixed-rate series) 1996-3 could trigger an early amortization event, regardless of the amendment."
Is this enough to divert cash away from the fixed-rate series for a long enough period of time that fixed-rate triple-As never see any of the shared excess spread? Admittedly, many of Prasad's assumptions are extreme, "mostly because much of the necessary information is not public," he notes.
JPMorgan Securities head of global structured finance research Chris Flanagan concurs that the proposed amendment is "not foolproof." Adding that it is possible to set stresses that are sure to breach triggers, "some assumptions out there may be too aggressive, therefore making any flaws more significant than they actually are," Flanagan said.
Banc One Capital Markets' Alessandro Pagani thinks that it is possible for the triple-B rated C class bonds to begin trapping cash, but the important factor is how long they do so. "All of the floaters have different excess spread levels and the likelihood of all of them remaining below the 4.50% trigger level for more than two months is unlikely," he said.
The trigger within the floating-rate series that investors should keep an eye on is 4.00%, Pagani notes. Using Morgan Stanley's assumptions, Pagani believes that the fixed-rate series would not be deprived any cash unless the floating-rate series sees excess spread dip below 4.00%. If excess spread were to fall between 3.50% and 4.00%, the reserve target would become 2.50% of principal balance, which would likely take more than two months to fulfill, Pagani added.