General Electric Company’s exit from retail lending could lead to an increase in the required credit enhancement levels and the risk premium required by the market on its $9.2 billion of outstanding credit card securitizations, according to a Wells Fargo report.
GE made the announcement on Nov.15 2013. The plan is to split off GE’s North American retail finance business, which includes its credit card operations, in 2015.
For now, ratings on the notes are safe. Moody’s Investor Service said that while the split is credit negative for GE’s credit card trust it would not place the notes under review. Fitch Ratings and Standard & Poor’s also said that they would not take any ratings action on the notes.
Much of the decision from all three ratings agencies is based on the adequate credit enhancement of the notes. Credit enhancement for the triple-A rated, senior bonds issued under the trust is 20.75% for fixed rate bonds and 23.75% for floating rate bonds issued after 2010.
However, Wells Fargo believes that, because the ratings agencies have put increased weight on the financial strength of the sponsor when they determine the required credit enhancement for credit card ABS, the credit enhancement required by them “seems likely to change,” if the new sponsor, post-split, is not as financially strong as GE Capital.
GE’s Capital Credit Card Master Note Trust’s assets consist of receivables from private label and co-branded credit card accounts originated and underwritten by GE Capital Retail Bank. The receivables currently in the trust portfolio are primarily from programs of retailers JCPenney, Lowe's, Sam's Club, Walmart, Gap, Belk, Dillard's and Chevron. Of the total ABS outstanding, $2.7 billion of will mature in the first half of 2015, according to Wells Fargo.
Moody’s explained that it’s the sponsor’s ongoing willingness and ability to maintain card utility (the purchase rate) is a significant driver of trust collateral performance in an early amortization scenario. Under this scenario, it’s the sponsor that must allocate cash flows to bondholders rather than reinvest them in newly generated receivables.
“If liquidity and financing resources are not sufficient, the sponsor may have no choice but to revoke cardholders' charging privileges and its servicing duties may need to be transferred to a successor,” said Moody’s. “The result would likely be significant deterioration in collateral performance, putting the bondholders at a greater risk of loss.”
Wells Fargo also noted that investors may look for an increased risk premium on the bonds going forward because the notes will no longer be related to GE. “It would be difficult to forecast the degree of change in risk premium because we do not yet fully know what the new sponsor will look like,” said Wells Fargo.