Bank of Montreal is issuing its third cross-border credit card securitization of the year, according to rating agency presale reports.
The $423.2 million Master Credit Card Trust 2018-3 consists of three tranches of notes maturing in January 2022: $400 million of floating-rate Class A notes that benefit from 5.5% credit enhancement are provisionally rated triple-A by Fitch Ratings and Moody’s Investors Service; $8.5 million of fixed-rate Class B notes with 3.5% credit enhancement are rated double-A; and $14.8 million of fixed-rate Class C notes are rated BBB.
In addition to credit enhancement, all three classes of notes benefit from any cash trapped in the cash collateral account. This account is not funded at closing, but will begin trapping if the excess spread, or the difference between the interest received on the collateral and the interest paid on the notes, falls below 4.0 percentage points.
Lead underwriters are BMO Capital Markets, BofA Merrill Lynch and Citigroup.
The notes are backed by unsecured, revolving credit card receivables originated by BMO. The portfolio includes mostly prime receivables. In comparison to its U.S. and Canadian peers, the MCCT pool has a higher, but generally stable delinquency rate, a higher yield and payment rate, and is more seasoned, according to Fitch Ratings.
Both Fitch and Moody’s see the high seasoning of the portfolio as a credit strength. Over 36.8% of accounts, representing 52.9% of outstanding receivables, originated more than 10 years ago. “Cardholders who have been making payments on their cards for a long period of time are less likely to default in the future,” Moody’s notes in its presale report.
The trust’s average payment rate for the six months that ended June 30 was 50.2%, which was higher than the average for the Canadian market, per Moody's, which says this is indicative of high credit quality obligors who use the cards more for convenience than credit. “For ABS investors, the higher the payment rate, the greater the likelihood that principal would pay down in a timely manner in an early amortization scenario.”
Challenges include the potential for weaker performance following future account additions and generally high levels of consumer debt in Canada.
Consumer debt in Canada is at a historical high, which makes Canadian consumer loan obligors increasingly vulnerable to higher market interest rates. A sudden interest rate shock could result in more personal bankruptcies and higher consumer credit losses.
Also, should BMO decide to add receivables from accounts of lower credit quality than those in MCCT today, the average receivable credit quality will deteriorate. As of June 30 the seller's interest in the MCCT Custodial pool was 16.6%, which exceeded the minimum seller’s interest requirement of 8% but indicates that there will likely be a pool addition in the future.