Moodys Investors Services downgraded the subordinate class C and D notes from Capital One Multi-asset Execution Trust (COMET) to Ba1 from Baa2 and to B1 from Ba2, respectively, citing an increase in the trust charge-off rate and a decrease in the principal payment rate over the past year.
Capital One, unlike other credit card issuers, chose not to add extra credit enhancement to COMET to avoid possible rating downgrades, citing potential adverse reactions from regulators. The company believes Moodys analysis is wrong, pointing out that other rating agencies do not have the trust on review for downgrade.
While adding credit enhancement enables a trust to withstand a higher level of charge-offs and provides a measure of ratings stability for investors, the extra enhancement adds value only in an early amortization scenario. Barclays Capital analysts believe that issuer support of credit card trusts is more important for bolstering yield to avoid early amortization. This option, along with the ability to add enhancement in the future if necessary, remains open to Capital One. The bank would seek support for its trust to avoid early amortization, should the need arise, analysts said.
COMETs collateral performance generally compares favorably with peers, as well as Barclay Capitals index of aggregate bank card metrics. For the June distribution date (May collection period), COMET had the third lowest gross charge-off rate among major bank card issuers, placing it in the middle of the pack. However, the yield on COMET is the second lowest, resulting in 1m excess spread, which is also average.
Delinquencies and charge-offs have been trending higher since mid-2007 in connection with the declining housing market and deteriorating economy. Yield and payment rates have been declining over the same time period, but have deteriorated more sharply since the beginning of the year.
As a result, 1m excess spread has fallen rapidly, dropping to 4.5% in May from 7.5% in January (3m excess spread declined to 4.5% in May from 8.1% in January). COMET is one of the few trusts that has not yet breached an excess spread trapping trigger.