At the Information Management Network's 14th annual ABS East conference in Hollywood, Florida last week, it was easy to see that times are tough. However, it is still a pretty good time to be a credit card issuer, speakers said.
This was particularly true for top tier issuers like Citigroup and JPMorgan Chase, where performance is the strongest. Tier two issuers, like Capital One, were defined, for both credit cards and autos, as those whose receivables were more subject to credit deterioration, and were more dependent on securitization.
Credit card issuers currently have flexibility to adjust for margin compression resulting from current capital markets conditions, one panelist said. Furthermore, in credit card deals, as is the case with auto securitizations, the servicing is rarely sold, so issuers retain an interest in how the bonds perform.
But in this negative economy, losses will undoubtedly rise, though not to the same magnitude as in the mortgage space, panelists said.
Household net worth has dropped $2 trillion to $56 trillion and household debt is currently at a whopping $14 trillion, said a speaker in one of the general sessions on Monday morning. Revolving credit rose 5.7% from August 2007 to August 2008.
But recent retail numbers are encouraging, another panelist pointed out. U.S. retail and food services sales for September were $375.5 billion, a decrease of 1.2% from the previous month, and a drop of only 1% from September 2007, according to a report this month from the U.S. Department of Commerce.
Consumers will have to learn to live within their means, the panelist said, which may be hard for the wider economy, but good for those buying the credit product.
Since competition in the sector is down, buyers have more flexibility in choosing their portfolio of consumer ABS assets, including securities with borrowers of higher credit quality and longer tenures.
In the auto space, GMAC Financial Services said this month that it will only make loans to borrowers with a FICO score of at least 700, a panelist noted, with an advance rate equal to or less than dealer invoice. In other words, borrowers will have to make a down payment on the vehicle.
Lower Quality, More Creativity
Harsher economic conditions have also made it difficult for subprime auto issuers to stay in business via securitizations. This has forced those lucky enough to do a deal to be creative in structuring their transaction, a panelist said, especially since monolines are not as present in the market.
This month, AmeriCredit boldly priced a $500 million offering of automobile receivables-backed securities using a senior/subordinate structure, a panelist pointed out
Though the deal was expensive for the issuer, who had to give warrants to the banks involved in the deal, including Wachovia Securities and Deutsche Bank, "it gave them the ability to live another day," the panelist said.
Short-term paper priced at 100 basis points over Libor. The triple-A rated A-2 and A-3 notes have a one-year average life and a two-and-a-half year average life, respectively, with pricing at 400 basis points over Libor for the A-2 class and 500 basis points over Libor on the A-3 class of notes, according to the ASR Scorecard Database. The B and C tranches were retained by AmeriCredit and pledged as collateral to secure borrowings under AmeriCredit's funding facility with Wachovia Bank.
Servicers Amp Up Efforts
To further prevent losses, effective servicing techniques are critical. One speaker noted that her firm has created an automated process that directly emails borrowers if they are not able to reach them by phone, thereby reducing the time collectors spend chasing down phone numbers.
The firm also now automatically requires borrowers to update their contact information if using the firm's web services.
While on the auto side it is not very difficult to repossess a car, some prime issuers may not have completely thought out these strategies prior to the dip in the economy, the panelist noted.
Surveillance is also key to gauging potential losses and assessing market risk. On the credit card side of the consumer ABS space, market participants are tracking the unemployment rate as one of the key factors affecting performance.
On the auto ABS side, recovery rates for repossessed vehicles, the direction of the broader economy, gas prices and auto resale values are all taken into account.
On a deal-specific level, market participants are also keeping a close eye on excess spread, since that is the first line of defense against losses, a panelist said.
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