ABS issuance in the credit card industry might see a slow-down in the short-term as consolidation gains traction with the recently announced acquisitions by Citigroup Inc. and Washington Mutual Inc. Over the long term, however, fewer players might give the sector a boost.
Citigroup said on June 3 that it would acquire $4.4 billion of credit card receivables from Federated Department Stores Co. and purchase an additional $2.2 billion of May Department Stores Co. receivables when its acquisition by Federated is completed. Meanwhile, Washington Mutual announced days later that it would acquire credit card company Providian Financial Corp., which has an $18.1 billion non-prime credit card portfolio.
Jeff Salmon, a director of ABS research at Barclays Capital, said he expects near-term credit card ABS issuance from Providian to decline somewhat as the company will likely wait until the acquisition is complete, sometime in the fourth quarter, to launch a new structure. Providian issued nearly $3 billion in the credit card sector in 2004, but has yet to bring a deal this year. Federated has only $500 million of ABS outstanding and has not priced a new deal since 2001, and was not likely to be in the market this year with or without the Citigroup deal.
In the long-term, Salmon said Providian might benefit from the strength of its new parent company, Washington Mutual, and use that strength to bring more deals. "We will probably see the same kind of issuance as in the past - if not more, as investors look at who is the parent company [on these deals]," said Salmon. "Providian will get better execution in the ABS market...and should find the ABS market more attractive." Furthermore, Providian will be able to expand its credit card portfolio through cross selling with Washington Mutual's existing banking customers.
It is less clear what incentive Citigroup would have to securitize its soon-to-be-acquired $6.6 billion in credit card receivables, and the company could simply opt to keep them on its balance sheet. "It is way to early to tell right now," said Salmon. Citigroup will take over Federated's and May's receivables in three stages through late 2006.
Credit card issuer The Metris Companies is widely believed to be the next company in line for a takeover. Like Providian, Metris has climbed its way out of financial trouble in the past few years and the quality of its borrowers and its trust performance has been improving.
The Citigroup deal is part of a two-year consolidation streak that has seen retail credit card portfolios from the likes of Saks Inc., The Home Depot, Inc., Sears Holdings Corp., Circuit City Stores, Inc., Sunoco, Inc., Mervyn's LLC and Dillard's, Inc. grabbed by third party specialists such as Citigroup and General Electric Co. Consolidation in the general-purpose credit card market, in which Providian operates, has been going on for ten years.
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