When compared to the steep decline in issuance of other forms of ABS this year, and the broad sweep of the credit crisis, market conditions for debt backed by card receivables have held up quite well.


But strains have been mounting. Spreads between card bonds and the London interbank offered rate have jumped 205 basis points since May 1, to 325 basis points as of Oct. 2 for five-year, floating-rate triple-A securities, according to JPMorgan Securities analysts.

And last month rating agencies downgraded or put on review a slew of Washington Mutual and Advanta Corp. card bonds, citing among other reasons increasing chargeoffs and concerns over servicing quality.


Discover Financial Services said last month that it might refinance with deposits all the $2.6 billion of its card securities maturing during its current fiscal quarter, because of high costs in capital markets. And on Monday, American Express Co. published an overview of its liquidity and capital resources, "in light of recent conditions in the financial markets."


Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co., said in an interview Tuesday that funding costs are a problem for issuers — particularly for Amex, which has less access to deposits than some of its card rivals — but securitization remains viable for now.


"It would take probably a very sharp and large increase in unemployment" to choke off the market completely, he said. "The credit card structure has been tested over time through downturns. We'll just have to see how bad this downturn gets."


Katie Reeves, director of asset-backed securitization research at Deutsche Bank Securities, said in an interview Tuesday: "We do still see trades get done in the secondary market. If that were to go away, that might be some indicator that appetite for primary market issuance has completely dried up. But I don't see that happening."


In a note to clients issued Tuesday, Valentin lowered his earnings estimates for Amex by 26 cents for this year, to $2.31 a share, and by 67 cents for next year, to $2.08.


He cut his share price target by $4, to $28, citing disruptions in the capital markets and the "prospects of increased funding and credit costs."


The New York card company said Monday that it has about $3.6 billion of long-term debt and no off-balance-sheet securitizations maturing this quarter.


About $20.1 billion of its long-term debt and off-balance-sheet securitizations will mature next year.


Amex said it cut the full-year funding target about 16% from the figure it gave at the end of July, to $27 billion, citing its anticipation of slower receivables growth "and reductions in net operating cash needs."


(One notable element of the pullback: Amex says that it has lowered credit lines for about 10% of its cardholders, more than twice as many as it would in a typical year.)


Amex said it had already raised about $23 billion, or 85% of its target.


Sanjay Sakhrani, an analyst at KBW's Keefe, Bruyette & Woods, said in an interview Thursday, "With American Express, you do have a pretty substantial amount of funding that's coming up for maturity next year, and that needs to be renewed, and in this environment, it's a tough task."


According to a Deutsche Bank Securities research report published Tuesday, about $21.3 billion of bonds backed by credit card receivables are due to mature this year, and $66.7 billion are scheduled to mature next year.


According to JPMorgan Securities, issuance of card bonds in the first three quarters of this year fell 17.9% from a year earlier, to $60.4 billion, while total issuance of asset-backed securities fell 73.7%, to $128.8 billion.


Most of that total decrease for ABS can be attributed to the fact that no bonds backed by home equity loans have been issued since January.


Issuance of credit card bonds has fallen sharply as the year has progressed — last month's volume was less than one fifth the amount in January.


But despite these declines, "investor demand has held up pretty well recently," Valentin said. "The fact that you're still securitizing triple-A in this environment points to how robust the structure is."


In a report published last week, analysts with Barclays's investment bank in New York wrote that last month's issuance "shows that deals can get done in the current environment, albeit at all-time high funding costs."

Reeves said the generally conservative nature of card issuers helps explain the overall endurance of the credit card securitization market.


"Ten years ago you had about 20 issuers, and maybe four or five of them were subprime issuers, and a couple more were the retail card issuers," Reeves said.


"So when you look at the entities doing deals now, it's the bigger, money-center banks that people know and that have been doing cards, frankly, for a couple decades."


These companies "been around a long time," Reeves said. "The agencies are very familiar with them. They've been able to take the rating agency models through several cycles in the economy. I don't know that any of them have been" through "what we're going through now, but they have more data points."


In a report published in June, Fitch said that triple-A card bonds could withstand an unemployment rate of up to 20% before defaulting, and triple-B bonds could withstand a rate of up to 11%, though downgrades under heavy stress "would be inevitable" before default.
For the analysis, Fitch assumed a "base unemployment rate" of 5%. It said any increase in that rate would be matched by an identical increase in chargeoff rates for prime accounts, but the increase would be more rapid for subprime accounts.


(Fitch said its study looked at unemployment in isolation. "It is certain that a series of other variables will likely amplify defaults and losses in an unemployment environment in excess of 8%-9%.")

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