Just over 18 months have passed since Citibank unveiled its "Block & Trap" de-linked credit card issuance vehicle, and it has proven to be one of the more innovative technological advances the asset-backed market has seen to date.
The original Block & Trap technology has spread to two of the larger issuers in the sector, MBNA and most recently, Bank One. Additionally, there are expectations that the de-linking of subordinated notes and the seniors they enhance will eventually be adopted by all of the major credit card issuers as well as applied to other collateral types.
Capital One recently announced plans to unveil a new twist on the de-linked trust with an added feature, dubbed "Scaling," aimed at increasing the efficiency of the subordinated notes to enhance the seniors with as little wasted subordination as possible. Structural innovator Salomon Smith Barney has won the lead mandate for the Capital One offering, expected this quarter.
With the ability to essentially bypass the most challenging aspect of selling ABS, Citibank, MBNA and now Bank One can act opportunistically, placing large chunks of triple-A-rated paper when conditions are most favorable, without having to simultaneously sell pesky single-A and triple-B-rated notes, in a fashion that more closely resembles the unsecured underwritten debt market.
"The fact that most of the large issuers are adopting this structure is a validation of its benefits, not just to issuers but to investors," said Salomon Managing Director Bob Malin, who pioneered the first such structure with Citibank. "One of the goals we had was to get the sub tranches into the fixed-income indices. The liquidity of the sub tranches was a draw for the buyside."
Recent credit card offerings from American Express, Chase, Discover and Fleet, the remaining large issuers with the traditional "old school" master trusts, have contained sub classes ranging from $56 million to $90 million in size, and were likely placed with just a small number of accounts.
Barclays Capital researcher Jeff Salmon agrees with the benefits of the added size for subs, noting the added liquidity of subordinated notes has led to tighter spreads for these large issuers in the sector across the board.
In fact, the most recent offering from Bank One priced inside of the previous sector tights for subordinated notes, set by Chase on March 6.
"Investors have embraced this technology as the benchmark structure for credit card issuers," Malin said, adding: "Eventually all of the top-tier issuers, that issue sub bonds, will likely adopt the structure."
Even the little guys have gotten in on the action, as retailers Saks Inc. and Circuit City have each sold a version of the de-linked structure, although neither has gone so far as to set up new trusts to do so. Each issuer has priced subordinate classes and followed up prior to settlement with the seniors and each deal was led by Banc of America Securities.
As far as penetration into other sectors, this technology would be the most beneficial to revolving asset collateral, that would have a senior/sub structure, notes Malin, such as wholesale dealer floorplan, home equity line of credit or even trade receivable collateral.