Investors can find confidence in the recent phenomenon of card issuers rescuing their credit card deals, according to William Black, senior vice president of Moody’s Investor Services.

“An issuer providing aid to its trust demonstrates commitment to ABS programs that resonates well with investors,” Black said.

Since February, five of the U.S. credit card “Big 6” — American Express, Bank of America, JPMorgan Chase, Citigroup and Discover — have come to the aid of their trusts. Capital One is the only one in this group that has declined to do so. 

What are the primary motivations for this?

According to Black, it is “to shore up the credit profile of the note,” he said. “Concerns regarding narrowing of excess spread, which would lead to cash trapping and perhaps billions in financing coming due ahead of schedule, is enough motivation for banks to provide aid to their trusts.”

As mentioned earlier, Capital One is the only bank out of the group of six to be inactive toward its trusts, and this does not come without ratings consequences. “Their subordinate class C’s and D’s were under review for months,” Black noted, “and last week they were downgraded.”

Capital One faces the same challenges as other issuers, and will likely experience further deterioration, yet it has not acted in the same fashion as its peers.

Providing aid will cost the banks since their regulators and/or auditors might require their entire master trust be reconsolidated onto a bank’s balance sheet, among other things.

This means the bank would be required to hold loan loss reserves for the securitized loans, and it  would also need to assign the full Basel risk-weighting to those loans.

These negative implications, however, do not outweigh the benefits of providing aid to these banks’ credit card trusts. It will help these institutions avoid downgrades and early amortization on their trusts as well as boost investor confidence.

“The issuers are going to have to deal with the problem one way or another,” said Mike Dean, a managing director in Fitch Ratings’ ABS group.  “So taking action on the collateral side — trying to boost yield, cutting credit limits for riskier investors, and adding enhancements to existing transactions — will keep the pool operating as originally anticipated.”

Moody’s said in its July 7 credit card statement that had it not been for issuer action, more card ABS downgrades would have occurred.

It is uncertain, however, how long the amount of aid that has been given will suffice in improving the conditions of the ABS programs. It is also not sure whether credit card companies will be able and willing to provide more aid, and to what extent if they can, in the future.

“Threshold varies,” Dean said. “Various banks have taken different actions. Aid to collateral performance is temporary, but re-pricing of portfolios and cutting riskier lines is part of the new operating environment, so the banks need to see how they are going to operate their credit card lines going forward. The improvements are more permanent, although are still subject to the credit environment, and more aid depends on the issuer.”

Meanwhile, Black affirmed that Moody’s is not counting on any additional support from issuers or incorporating any assumptions of potential aid to the trusts into current ratings.

For now, card issuance is improving. Both Dean and Black attributed the issuance revitalization to the government’s Term ABS Loan Facility (TALF).

“Before TALF existed, credit card ABS was at a standstill,” Black said. “TALF deals are increasing, and now we’re even seeing the execution of non-TALF deals.”

So far this year, $17.5 billion of TALF and $7.3 billion non-TALF card transactions have been issued.

Though non-TALF deals are on the rise, Black said the expiration of the U.S. Federal Reserve program would be disadvantageous for the card ABS sector.

Set to expire at the end of this year, the program has created very positive results, leading many to predict an extension.

“Collateral performance will continue to deteriorate in the changing environment of 2010,” Black said. “We don’t want to cut off this TALF program which has so many positive aspects, such as bringing participants back to the marketplace, especially with the many challenges and uncertainties facing the industry, such as changing consumer behavior and significant accounting and regulatory changes.”

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.