It seems that issuers are being punished for being more forthcoming with portfolio composition information and for working more closely to quell investor concerns. The most recent example is Sears Roebuck Acceptance Corp., which was back in the headlines again last week, following a specific breakdown of its two portfolios and the announcement that it would voluntarily increase credit enhancement on its securitizations on a retroactive basis.

Researchers at Lehman Brothers issued a report titled "Sears MasterCard: All That Glitters is Not Gold," stating that while portfolio yield (15.3% for MasterCard, 19.8% for Sears Card) and chargeoffs (3.6% for MasterCard, 6.5% for Sears Card) are currently healthy, "performance numbers are masked by the rapid growth rate of the portfolio."

Noting that chargeoffs peak 12 to 24 months after origination, Lehman says "the impact of seasoning is evident in the continual increase of MasterCard delinquencies and chargeoff levels since portfolio inception."

Assuming both a rapid (50%) and non-existent (0%) portfolio growth scenario, Lehman believes chargeoffs will increase significantly going forward. Using a conservative 12-month lagged chargeoff analysis and a less conservative nine-month lag, Lehman expects "MasterCard chargeoffs to at least rise to the high single digits, even if the portfolio continues to grow at a robust rate."

The opposing view on Sears is offered by Banc One Capital Markets, which agrees that portfolio growth obscures the numbers, but believe there is limited downside. While conceding that growth has been rapid, BOCM points out that 86% of the Sears MasterCard portfolio consists of converted Sears Card holders - meaning that these accounts have already seasoned.

Speaking of the competing research, BOCM argues "with such a massive conversion effort, one of the key assumption of the lagged loss analysis, that recent receivables growth is from new unseasoned accounts that do not contribute to current losses, is critically weakened."

But Lehman also takes exception to the high percentage of conversions within the portfolio, noting that accounts have been "cherry-picked" for the MasterCard portfolio, leaving the Sears Card portfolio with the less desirable credits. "Further conversions" Lehman notes, "will exacerbate the adverse selection problem," sending Sears Card chargeoffs up by 100 basis points to 7.5% in the near term.

Unlike the performance debate, the increased credit enhancement is a positive by all accounts. The key being the on-balance-sheet accounting methods used by Sears, allowing the issuer to get hands on with its trust, without the threat of regulatory recourse.

Banc One says the increased enhancement is "a clear sign that the company has the willingness and the flexibility to support its securitization program." Lehman agrees for a change, adding that Sears has shown it "has more flexibility to protect its ABS transactions."

Both banks expect performance to deteriorate to some extent going forward, with Lehman "maintaining a cautious outlook for the SCAMT given our expectations of trust performance deterioration, weak retail performance and supply rotation." BOCM, meanwhile, believes the deterioration to be manageable and the "excess spread present in the transactions is sufficient to absorb the rising losses."

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