Holders of approximately $1 billion of First North American National Bank (FNANB) credit card ABS cheered last week's announcement that the $1.5 billion portfolio would be sold to FleetBoston Financial. While the move was viewed an undeniably positive for FNANB parent Circuit City, objective observers were questioning Fleet's motivation for acquiring the underperforming portfolio.

Word broke last Wednesday that Circuit City agreed to sell its $1.5 billion FNANB Visa/MasterCard portfolio to Fleet for $1.3 billion, roughly a 13.5% discount. Circuit City will realize after-tax net proceeds of $282 million. The Circuit City Credit Card Master Trust retail credit card portfolio was excluded from the sale. The retail chain announced in August that it would explore the possibility of selling its credit card operations, including its retail store card portfolio.

While FNANB ABS holders were happy to see the portfolio sold to the highly rated Fleet (A1/A/A), spreads remained unchanged, thanks to the two outstanding transactions being wrapped by Ambac.

Sellside analysts, on the other hand, were curious as to why Fleet was interested in the subprime portfolio. "While at this discount, there is little doubt that this will be profitable for Fleet," noted Banc One Capital Markets researcher Alessandro Pagani. "But this puts Fleet in the subprime segment, which I don't understand."

Fleet's credit card portfolio, with chargeoffs currently hovering around 8%, is higher than the historical 6% average. The FNANB portfolio, by contrast, sports an average chargeoff rate of 14% to 15%.

But Fleet may be either trying to resuscitate a lagging portfolio, or be trying to gain experience servicing lower credit-quality borrowers, noted BOCM's Pagano. Fleet does has experience nursing sick portfolios back to health, as it did with Advanta Corp.'s credit card portfolio, albeit after some difficulty.

What remains to be seen is Fleet's treatment of the portfolio, as most think it will initially be held on the bank's balance sheet, allowing manipulation of the portfolio. Fleet also has experience with this aspect, as it amended its trust to prevent hitting early an amortization trigger earlier this year. Some speculated that Fleet could rotate higher-credit Fleet accounts into the FNANB trust, thus offsetting the higher chargeoffs to some extent.

In time, assuming a higher-than-average attrition rate, analysts theorize Fleet can turn FNANB around.


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