Issuance of top-rated credit card ABS has picked up this year, but investors have faced a dearth of subordinated tranches until GE Capital's $76 million Class B five-year tranche priced Nov. 25 at 285 basis points over mid-swaps, setting a benchmark for more issues.
Investors eager for more of the relatively lucrative paper, however, might be disappointed. This is at least until regulatory and accounting issues are resolved, and even then, many credit issuers may simply not need the financing.
David Schulz, capital markets leader at GE Capital Retail Consumer Finance, said the deal - which was a refinancing existing debt - was prompted by demand from investors and represented the firm's fourth transaction this year, each one providing improved pricing. He added that GE cards needs no further funding in 2009. The most recent deal "came as a result of reverse inquiry [by investors], and if we have further reverse inquiry we may consider another one this year, as we always do."
GE Capital has $4.3 billion in ABS debt coming due in the first half of 2010.
Schulz described pricing quotes from bankers as "mixed" and varying widely "especially as you go down the capital structure."
But, he said, the pricing on the recent five-year subordinated portion, rated 'A+' by Fitch Ratings, "was generally within the range of dealer expectation."
He added that today's investors comprise mostly more traditional asset managers such as pension funds and insurance companies and far fewer hedge funds, structured investment vehicles and other non-traditional money managers. "I expect that trend to continue," he said.
GE Capital issued three 'AAA'-rated deals earlier this year, the first one a three-year, $1 billion transaction that priced in May at 210 basis points over mid-swaps under the Federal Reserve's TermAsset-Backed Securities Loan Facility (TALF). Three months later, it priced a $1.7 billion TALF deal at 155 basis points over, and in September, it sold its first non-TALF transaction this year, pricing $750 million of two-year securities at 130 over.
The most recent deal - also non-TALF - saw its 'AAA'-rated tranche upsized to $475 million from $400 million and priced at 140 basis points over mid-swaps, which Schulz said translated to approximately 110 basis points to 120 basis points over in two-year paper.
That's steep pricing compared to two years ago. Schulz said similar 'AAA'-rated paper priced from one to five basis points over mid-swaps before the credit markets froze up, while Class B tranches ranged from 10 basis points to 20 basis points over, depending on the tenor.
Jon Thompson, vice president of structured finance at Advantus Capital, called the pricing "fair," given the deal's long tenor and GE Capital's focus on issuing cards through retailers. That focus has typically required a pricing premium compared to ABS from issuers that distribute their cards more broadly, such as JPMorgan and Citigroup. Thompson noted that spreads on credit card ABS have widened over the last month or so.
In fact, GE Capital might have priced its deal just in time. Citigroup entered the market last Wednesday with a $1.5 billion TALF-eligible deal - carrying the 'AAA' rating required by TALF - that priced at 255 basis points over mid-swaps. It was issued from Citigroup's Omni shelf, also a retail rather than general card program, and driven by significant reverse inquiry.
Dec. 3 was the most recent monthly TALF loan application deadline, ahead of which about $4 billion of TALF-eligible deals had emerged, compared with $6 billion the month before.
In terms of GE Capital's subordinated tranche setting a benchmark for subordinated ABS from other issuers, "It's another data point," Thompson said. He believes issuance could be inhibited until regulatory and accounting issues are resolved.
Those issues include two new accounting standards published in June by the Financial Accounting Standards Board (FASB) - Financial Accounting Statements (FAS) No. 166, Accounting for Transfers of Financial Assets, and FAS 167, Amendments to FASB Interpretation No. 46(R) - and the Federal Deposit Insurance Corp.'s (FDIC) securitization rule.
The accounting changes will curtail banks' treatment of transfers of assets, such as credit card receivables, as sales for accounting purposes, starting in the first quarter. Since that accounting sales treatment is one of the conditions required by the FDIC to continue to treat the asset transfers as sales if the issuer becomes insolvent and the federal agency acts as receiver, concerns have arisen among issuers about what form the new rule will take.
The FDIC announced a few weeks ago that it would extend current treatment to March 31, grandfathering transactions completed before then. The regulator plans to publish its proposal for the new rule, which may include compensation restrictions, later this month.
Given that uncertainty, banks might be expected to take advantage of the issuance window, whether for 'AAA' or subordinated tranches, before the FDIC's new rule becomes effective. GE Capital's subordinated deal, however, was the only one to hit the public market before ASR went to press last week, and sources reported no subordinated tranches in the pipeline. And apart from Citibank's transaction last week, there's been no rush to bring 'AAA' tranches to market. Schulz said the FDIC's pending safe harbor rule has not impacted GE Capital's ABS issues.
On the subordinated front, Standard & Poor's has publicly rated nearly $6.5 billion in subordinated ABS from credit-card issuers so far in 2009 - $5.4 billion in September alone - compared with $3.4 billion last year.
Felix Herrera, a director at S&P, said that the requirement for TALF financing to hold a 'AAA' rating has typically prompted issuers to sell only the 'AAA'-rated tranches and retain the subordinated pieces until a better pricing environment occurs. "In the auto space, rated subordinated tranches that were originally retained by the issuer at closing were subsequently sold to investors looking for more yield," Herrera said.
So far, that hasn't happened in the credit-card sector. John McElravey, a senior analyst at Wells Fargo Securities, said issuers might be waiting until the FDIC issues its proposal later this month. "If they're not desperate for funding, they may be willing to wait a few weeks to see what the FDIC has to say," McElravey said, adding that in any case, deals will have to be wrapped up by Dec. 18 or so, before the Christmas holiday, leaving less than a two-week window.
A confluence of other issues might keep issuance light until they are resolved and the credit markets stabilize further.
Katie Reeves, an analyst at Deutsche Bank Securities, said that this year, most credit-card issuers have retained the subordinated tranches as a form of credit enhancement for their deals. She noted in Deutsche's Nov. 5 issue of Securitization Monthly that the banking regulators issued a proposal in August that reinforces the linkage between regulatory capital requirements and accounting treatment.
The proposal essentially said that ABS assets that remain on-balance sheet for the purposes of generally accepted accounting principles (GAAP) would also be treated as on-balance sheet for regulatory-capital purposes. A final rule based on that proposal would result in a significant increase in capital requirements, making ABS issuance a less attractive form of financing. The industry clearly would prefer some off-balance-sheet leniency.
Issuers may also find selling subordinated tranches difficult in a TALF-fueled market. "TALF was a great program for investors and an OK program for issuers," said a top official at one second-tier credit card issuer, noting that government-provided leverage through TALF has generated returns on 'AAA' tranches that rival returns on subordinated securities.
"That means [returns on] the single-A tranche has to be above that, making it difficult to sell subordinated securities at an economic price because the spread is too high," the executive said. He added that retaining the subordinated portions requires holding more capital and could inhibit further issuance.
Reeves said in her report that there's also uncertainty about the extent FASB's accounting changes will require consolidation of ABS assets. She noted that in 2009, many banks added significant credit enhancement to their credit-card trusts. That violated "true sale" accounting treatment, forcing them to consolidate those assets even without FAS 166 and FAS 167.
"But for the few bank credit card issuers who have not yet taken such steps, the combination of FAS 166 and FAS 167 will in all likelihood result in the loss of their accounting 'true sale,' and force the consolidation of their securitized assets and related liabilities ...," the report said.
Perhaps the most fundamental obstacle to credit card ABS issuance is that many issuers simply don't need the financing.
Customer charge-offs appear to have stabilized and even dropped, but the National Retail Federation forecasts holiday-related shopping falling 3.2% from last year's, which had plummeted from the year before.
Consumer stinginess is expected to continue well into the future.
McElravey said receivables balances are shrinking for more credit-card ABS programs, so there's not a lot of need for issuers to bring new deals to the market, and by yearend refinancings are unlikely.
"Most likely they've done most of that already, before this point in the year," he said.
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