While most ABS sectors have so far equaled or outpaced their 2004 year-to-date issuance volumes, the credit-card sector has been conspicuously absent from the party with less than one-third of the issuance seen at this time last year. While theories abound for the dearth of credit card deals, the paltry numbers have left analysts scratching their heads. Some say, however, that the sector will correct itself and even beat last year's $52 billion total.
In a market that is driven mainly by reverse inquiries, Peter DiMartino, head ABS strategist for RBS Greenwich Capital theorized that many investors appear, by necessity, to be paying less attention to cards. "The average, active investment managers are compelled to look at the flows in front of them, hence, they are looking elsewhere for investment opportunities," he said. "The non-deal-driving investor can't sit around waiting for cards...If you're a crocodile and there are no antelope coming by your pond, you're going to have to start eating some zebras," added DiMartino.
"It's been somewhat of a disappointment," said researcher Jeff Salmon, director at Barclays Capital. Salmon said several trends over the past few years have converged that may be behind the dry spell. One is that large issuers have been scaling back their originations, especially in the prime space, as the bank and retail credit card market has become more and more saturated with card products. Another is that more issuers, particularly large banks, are deciding to keep credit card loans on their books, because they have excess capital and do not need the funding.
Additionally, added Salmon, there has been a considerable amount of consolidation in the industry and many of the smaller issuers have disappeared. In those cases, the acquirers tend to cut nonperforming accounts owned by the smaller entity and apply more stringent origination standards, both of which lower the amount of receivables available for securitization. Analysts at Lehman Brothers expect the consolidation trend to continue, writing that Federated Department Stores is likely to sell its $3.1 billion credit card portfolio, with $700 million in ABS
outstanding, following news of its plan to purchase May Department Stores.
"In a macro sense, there has been a massive refinancing of consumer credit card debt via the mortgage market," added RBS Greenwich's DiMartino. By using various methods of home equity financing, such as cash-out refinancing, debt consolidation loans and HELOCs, a substantial amount of credit card debt has been paid down, at least to the point where there appears to have been no new net growth in the sector, DiMartino said. "It becomes more startling when you consider that consumer spending has been very strong over the past year. So the card market's loss is the home equity market's gain, in my view."
Late last year, in a survey of ABS analysts, most predicted this year would exceed last year. The average of the six major banks that responded was $61 billion. To reach that pace, the sector should see $15 billion in the first quarter. With two weeks left before the start of the second quarter that seems unlikely.
So far, the sector has seen three deals totaling less than $3 billion, whereas last year's total at mid-March was nearly $10 billion. The three significant credit card deals this year were from Discover Card Master Trust, with a $1.5 billion deal, Capital One Financial's COMET shelf with a $175 million deal, an $875 million deal from Citibank N.A.'s Credit Card Issuance Trust and Chase Manhattan Bank's triple-B rated transaction that was slated to price after press time last Friday.
Salmon said that many issuers are simply waiting for their existing deals to mature and then refinance. According to Salmon's calculations, there is approximately $60 billion worth of credit card deals ready to roll off, in 2005. Of that, he expects $13 billion to $15 billion will not be refinanced. The rest is likely to come right back into the market. If it does, Salmon and his team are looking for 2005 to equal or exceed last year's volume. "We're [still] looking for issuance to be slightly above last year's volume," he said.
From an issuer's perspective, it is an ideal time to tap the credit card market. "Credit card issuers are getting some of the tightest historical spread levels...ever," said Salmon. Still, that does not seem to be drawing more into the sector.
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