Bon-Ton purge fails to remedy Comenity card-trust loss expectations

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Comenity Bank has purged bankrupt retailer Bon-Ton’s credit-card accounts from collateral for the 11 series of outstanding notes issued from its master trust.

But that hasn’t staved off expectations of continued higher-than-average losses for the private-label issuers’ next round of notes backed by credit-card receivables from cardholders from more than 70 different retailers.

S&P Global Ratings sees losses reaching 10.5% over the life of the $405 million of Seires 2018-B notes to be issued from the World Financial Network Credit Card Master Note Trust. That's two percentage points higher than initial expectations for 8.5% for the $591 million Series 2018-A issued in February. S&P has since revised loss expectations for all of the trust's outstanding series upward because of ongoing lackluster loss and payment-rate performance compared to peers.

“While the trust experienced historically low levels of losses after 2012 as the wider economy improved after the recent recession, since 2013 net losses have been trending upwards,” S&P’s report states. “For the past two years, the trust's net loss rate has been trending above our U.S. Private-Label Credit Card Quality Index (PLCCQI), while the payment rate has been lower over the same period.”

S&P, along with Fitch, has assigned preliminary triple-A ratings to the $300 million in Class A notes in the 2018-B series. The notes have 26% credit enhancement.

Since 2015, net losses for the trust’s portfolio have grown from 5.15% to 8.57% this year as receivables built up to $7.5 billion. Losses have been above the S&P’s private label index average since early 2013, which as of July had net losses of 5.34%.

The trust’s delinquency rate is also higher at 6.6% compared to the index’ 3.32%.

S&P’s report did not indicate the extent that the bankruptcy of Bon-Ton impacted the rising rates. Bon-Ton, parent company for a 256-store chain of department stores such as Carson’s and Younkers, filed for Chapter 11 bankruptcy in February before being liquidated in an April 2017 auction.

The stores have been reopened under new owners, and as of Sept. 1 Comenity had removed $508 million in customer accounts from its WFNMT credit-card ABS trust, according to a regulatory filing.

Retail store cards carry higher risks than general-purpose credit cards (Visa or MasterCard), since consumers may choose not to keep current on card accounts when a store affiliated with the card closes.

The same filing noted that Comenity added $832.8 million in accounts underwritten to jewelry retailers with the Signet Retail Group. The Signet accounts make up 11.86% of the receivables in the 2018-B series pool, second only to the 22.3% share of fashion retailer L Brands Inc. (which includes Victoria’s Secret and Bath & Body Works stores).

S&P has also this year lowered the assumed base-case payment rates on Comenity-issued cards to 14.5% from 15% last year. That is below other peer issuers, although S&P considers Comenity’s performance on par with others since the bank “caters to customers who want a relationship with the retailer (through customized permission-based emails, discounts, etc.), not customers who necessarily need credit to purchase from these retailers,” the report stated.

Comenity (which was formerly known as World Financial Network Bank) underwrites private-label retail credit cards primarily to soft goods (clothing) retailers. Those merchandisers make up 58.45% of the principal receivables of the collateral pool in 2018-B, followed by further retailers (19.8%), jewelry stores (13%) and department stores (8.13%).

In the new series, Comenity cardholders have a higher utilization rate (30.25%) and lower average age (66 months) than previous series, mostly due to the infusion of the new Signet accounts into the master trust this month. The $1,785 average credit limit is among the lowest in the private-label credit card sector. The accounts also have an average balance of $540.

The World Financial master trust’s portfolio had a balance of $7.45 billion as of July 31.

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