In more Enron Corp. backlash, reports surfaced last Wednesday that Circuit City's stock price was being negatively affected because, among other issues, equity investors were concerned with the company's use of securitization as a funding technique.
The jittery equity markets have been penalizing any company that appears to have accounting issues, and in this case, according to an article appearing on the TheStreet.com, investors were unnerved because Circuit City's financial statements are "complicated."
On a side note, there was more than $350 billion in total term asset securitization last year alone, of which Circuit City's credit card deals accounted for only about $490 million, or 0.14%. CarMax, a partially owned subsidiary of Circuit City, securitized an additional $1.15 billion in 2001.
Cited from Jeffries & Co. equity research, "With respect to the securitization issue, we don't see a problem. We simply note, however, it is an area that has made some investors nervous in the case of some other companies."
Regardless, the primary driver of Circuit City's falling stock price (a 16% dip last Wednesday) was the remodeling expenses the company is facing, and whether or not there will be sufficient return on that nationwide initiative.
Meanwhile, as noted in Banc One's research piece released last week (In Defense of Securitization), "The securitization market, in fact, is not cloaked but rather open and transparent, subject to the intense review of rating agencies and third-party investors. Go ahead and shine a bright light on securitization."
In the Circuit City example, some equity analysts have done just that (shined a bright light). Budd Bugatch, a research from Raymond James & Associates, for instance, presented an analysis of Circuit City's Credit Card Master Trust data, and concluded "analyzing the (Circuit City Credit Card Master) Trust 8K filings provides some clues to current sales trends."
This would appear to be an example of the securitization market's transparency, something that is being overlooked by those aligning ABS with Enron's off-balance sheet arrangements (not implying Bugatch has done that).
As for Circuit City's ABS, Barclays Capital researcher Jeff Salmon notes the slowing economy will hit this segment of the retail sector and is generally bearish on the retail sector.
Salmon tempered his questions with the fact that, currently, collateral performance in Circuit City deals is strong, with sufficient excess spread and stable delinquencies.
Down the pike...
If all goes as planned, both Circuit City and retailer Saks Inc. are expected to hit the market in the first half of the year with separate de-linked structured credit card ABS, sources said. These structures would be similar to the de-linked credit card deal sold by Saks last July, in which lead manager Banc of America sold $65.25 million of triple-B rated paper, and $336.0 million of triple-A and single-A rated paper the following week.
