Bank of America has removed nearly $3 billion of receivables from its credit card securitization trust over the past two months.
On Dec. 29, the credit card sponsor removed $570 million of receivables and on Nov. 30, it removed $2.1 billion of receivables. The trust still has $14.8 billion in outstanding ABS notes, according to Moody’s Investors Service.
The collateral is unlikely to be replenished.
Issuance of credit card-backed securities has been declining, in part because consumers are drawing down less on their lines of credit.
Just $27.3 billion of credit card ABS was issued in 2015, down from $44.6 billion in 2014, according to Wells Fargo. Wells expects issuance to be roughly the same in 2016 at $30 billion.
“In our opinion, a combination of fewer credit card loans outstanding, plentiful and inexpensive bank deposits, and regulatory changes with regard to bank funding with subordinated debt will likely result in lackluster credit card ABS issuance,” analysts wrote in a report published this month.
The good news for ABS investors is that levels of seller’s interest, or the amount of receivables not pledged to notes, remain high. This should help mitigate potential credit risk that might result from a lack of new collateral.
The size of the seller's interest is determined by the rating agencies and serves two primary purposes. First, it absorbs fluctuations in the outstanding principal balances of the designated accounts. The seller's interest exists to ensure that there will be sufficient collateral available to support the investor certificates. Second, it is available to ensure sufficient receivables exist following non-cash deductions in balances due to charge reversals, such as merchandise returns, disputes, and fraudulent charges.
Bank of America’s seller’s interest remains the highest of all trusts at 60.6%, according to Wells Fargo.
Moody’s Investors Service has confirmed the 'Aaa' ratings on the outstanding notes issued by BofA’s trust following the removal of accounts. The rating agency said that the removal of receivables “did not have an adverse effect on the credit quality of the trust's portfolio, and therefore on the credit quality of the notes, such that Moody's ratings were affected.”
Wells Fargo outlines the current level of seller’s interest in trusts relative to minimum requirements in the chart below.