While the ABS market usually equates thinning excess spread with deteriorating credit quality, some fixed-rate, high-coupon credit-card deals from sector benchmark Chase Credit Card Master Trust are showing three-month averages below 2%, despite obligor quality remaining near the top of the market.
Should a series post a negative three-month average excess spread, it would trigger an early amortization. Some analysts believe that J.P. Morgan - should it anticipate heading into negative territory - will act before that happens, because letting a prime, triple-A-rated credit-card securitization hit an early amortization trigger would be against the firm's own interests and arguably those of the entire credit-card market.
"The consequences would be negative for Chase if they violate the base rate trigger," said Juliet Jones, credit card analyst at Barclays Capital. "It would behoove them to do whatever they have to do to keep the deals going."
While declining to comment on any actions the firm would take, a contact at J.P. Morgan noted there has been a seasonal effect on portfolio yield, given fewer collection days in June. J.P. Morgan filed this comment to the Securities & Exchange Commission as well.
Credit-card analysts agree that portfolio yields tend to drop during June, as there are two less collection days in that month than in May, and then spike back up in July. Portfolio yield for the Chase Credit Card MT 1999-3, one of the deals in question, was 14.81% in May and 13.97% in June. In 2001, portfolio yield for Chase 1999-3 dropped from 18.15% in May to 16.64% in June, and back up to 18.37% in July. Both deals have fixed-rate coupons in the 6% to 7% range.
Interestingly, low interest rates tend to benefit the credit-card market, as issuers are able to fund off levels near Libor (the three-month rate is currently at about 1.81%). Non-prime issuers have particularly benefited from the funding gap, as they are less apt to lower their borrowers' interest rates. The environment, however, has raised challenges for the prime credit card issuers, who must compete for customers.
"These are high fixed-rate coupons that are getting hit by industry-wide rising loss rates and extremely low current funding costs, so the excess is being squeezed," said Barclays' Jones. "The yields on these deals have come down over time because many of [the obligors] are indexed to prime. Chase is still holding on to customers and not jacking up rates on them."
The A-class notes from the CCMT 1999-3 deal reportedly traded at 40 basis points over swaps last week. By contrast, new issue three-year fixed-rate prime cards currently price as tight as four basis points over swaps. One source calls this a "damn good way to make 40 over swaps," whether or not the deal eventually early amortizes.
As of the most recent reporting date, Chase Credit Card MT 1996-3 was showing a one-month excess spread of 0.32%, and a three-month average of 0.82%. Chase Credit Card MT 1999-3 was showing spreads of 0.69% and 1.18%, respectively.
In 1996, Citibank faced similar thinning excess spread issues on two 1990 vintage deals, both of which had coupons in the mid-9% range: Standard Credit Card Trust 1990-3 and Standard Credit Card Trust 1990-6. Citibank actually amended the deal documents to lower its servicing fee for the two transactions, which lifted the excess spread. Both the Standard deals were stand alone trusts, predating the master trust structure.
One of the advantages of the master trust structure is that excess interest from one portfolio of loans can be distributed to other portfolios in the trust. However, the redistributed excess spread cannot be used to thwart an early amortization trigger event, one bank researcher said.
There are several options that J.P. Morgan has to prop up the excess spread. The firm could attempt to amend its documents the same way Citibank did in 1996. Also, J.P. Morgan could add additional credit-card accounts to the portfolio, although the accounts would have to be higher yielding to lift the portfolio average. J.P. Morgan may have already added accounts that did not show up in the most recent reporting date.
Also, J.P. Morgan could discount and reclassify receivables to kick up the yield, although it could lose off-balance-sheet treatment if it went that route, a source familiar with the situation said.