Several investors last week brushed off concerns about the regulatory implications surrounding JPMorgan Chase's decision to adjust the definition of the Base Rate Payout Event.
Chase filed a proxy with the Securities & Exchange seeking approval to change the language of the Base Rate Pay Out Event in the Chase Credit Card Master Trust Series 1996-2, Series 1996-3 and Series 1999-3. The amendment would replace the term Portfolio Yield with the term Portfolio Supplement Yield, solely for the purpose of computing the trigger that determines if a Base Rate Pay Out Event occurs. Cash flows available to the transactions are not altered.
Chase's move reinforces a long-time notion that quality issuers are concerned with the performance of their securitization programs and will do what they can within the framework of those deals to make sure investors fair well. A primary motive, of course, is that sellers would like to retain access to the market. Recent regulatory scrutiny has made it more controversial for issuers to overtly support their deals because of the risk of "implied recourse."
Analysts said the implications remain unclear. Specifically, in 2002 regulators stated that actions aimed at supporting deals in risk of hitting a trigger would breach the low-recourse provision and that the issuer may need to forgo off-balance sheet treatment, according to Alessandro Pagani of the research group at Banc One Capital Markets. But Pagani offered his assessment with one caveat: application of the interagency guidelines is subject to interpretation.
Several investors contacted by IFR Markets assume that Chase vetted the prospect of the definition change with their respective regulators. "[Regulatory intervention] is always the fear when issuers make a move like Chase did, but my guess is that Chase would not have filed the proxy statement unless they vetted it with their regulators first," said one investor from a major shop.
Under the existing definition, the trust allows for shared excess spread to be used to cover interest shortfalls on the certificates and other obligations, such as deposits to the spread account, but is not included in the economic trigger. According to Pagani, the Portfolio Supplement Yield will include shared finance collections from all other series, meaning the amount of additional yield to be included each month in the trigger calculation depends on the three-month average excess spread of the series according to a particular schedule.
The amendments would need the approval of 50% of the bondholders, something BOCM analysts say is likely.
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