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Investors unfazed by Bon-Ton exposure in Comenity Card ABS

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Investors in Comenity Bank’s new issue of private-label credit card-backed notes don’t seem concerned that more than 11% of the receivables used as collateral are tied to the newly bankrupt retailer Bon-Ton Stores.

According to a regulatory filing Wednesday, Comenity has boosted the size of the latest issuance form its master trust bond to $591.5 million after pricing the $525 million of Class A notes at a coupon of 3.07% through joint lead arrangers RBC, BNP Paribas, Scotia Bank and SunTrust.

The deal was originally sized at $338 million in the offering proposed in its Feb. 15 prospectus for the 2018-A series through its World Financial Network Credit Card Master Note Trust.

In the Feb. 15 filing, Comenity (formerly World Financial Network Bank) disclosed that the trust’s $338 million pool would include 6.8 million Bon-Ton-affiliated cards with a principal receivables balance of $730 million. That is the second-highest retail-client exposure of more than 70 private-label card issuers.

Perhaps absorbing the potential shock to the portfolio is large concentration of receivables (23.5%, or $1.98 billion) linked to accounts with the healthier L Brands Inc.-owned chains of women’s specialty apparel and intimate stores, operating under the Victoria’s Secret, Bath & Body Works, PINK and other store fronts. L Brands, a single-B-rated retailer with a 3.3x as much debt as equity, had $12.6 billion in net sales for the 53-week period ending Feb. 6. The Columbus, Ohio firm is expected to report positive quarterly earnings next week.

Bon-Ton Stores (OTC: BONTQ), with dual corporate headquarters in Milwaukee, Wis., and York, Pa., filed for Chapter 11 bankruptcy protection earlier this month, after announcing plans to close 47 of its 260 regional stores operating under brand names including Boston, Carson's and Elder-Beerman. Bon-Ton in January entered into a forbearance agreement with lenders after missing a $14 million interest payment.

As a private-label issuer, Comenity bears additional risk with cards limited to use at specific retail stores. Besides underwriting consumers, the issuers also bear the risk of the chains themselves potentially closing stores or operations altogether, eliminating cardholders’ only outlets for using the cards. Private-label cardholders have historically higher default rates than bank-card users since consumers are more likely to quit paying on cards they can no longer use.

The 2018-A pool includes 75 retailers, with only four accounting for more than 7.5% of the total balance. Comenity, a subsidiary of Alliance Data Systems Corp. (NYSE: ADS), has 60% of the principal receivables in its servicing portfolio generated by clothing and other soft-goods retailers, 20% by department stores and about 18% by furniture retailers.

The accounts generating the receivables for 2018-A have an average balance of $475 on credit limits of $1,748 (a utilization rate of 27.17%, among the highest for private-label lenders, according to S&P). Cardholders made minimum payments on about 16.6% of the accounts, while nearly 9.6% pay off the balance in full every month.

Cardholders in the 2018-A issue on average have had their accounts about 70 months – with accounts older than five years generating 38.05% of the receivables. The base-case yield assumptions on the pool range from 17% (DBRS) to 25.25% (S&P).

Charge-off rates have been increasing in recent years, DBRS reports, rising to a net rate of 8.07% in December (DBRS is assuming a 9% charge-off rate for the 2018-A series).

The dilution rate of monthly merchandise returns, a key metric in private-label card performance, has remained “very low” in the post-crisis era for Comenity/World Financial, according to DBRS. The return rate was 2.44% as of December.

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