Beleaguered monoline credit card issuer The Metris Companies went from the frying pan into the fire last week, as all three rating agencies have now taken action on its credit card ABS. The actions prompted some researchers to start the vigil, recommending investors stay away from Metris Master Trust paper coming due in more than one year.
Already inflated spreads widened throughout last week on the news, with some 2000-3 senior notes due Oct 2005, paying a coupon of 26 basis points over one-month Libor, quoted late in the week in the 180-185 basis point bid and 220-225 basis point ask ranges. Triple-B rated notes closed last week quoted in the 2000 basis point area over one-month Libor, out from 1000 to 1100 basis points over as recently as last Monday.
Reflecting new concerns in the post-NextCard Inc. era, much of the concern was over the future of the seller/servicer instead of collateral performance, as Metris Master Trust has relatively healthy excess spread levels and only moderately rising delinquency and loss levels.
This is the culmination of a fundamental change in ABS, versus a strictly collateral performance-based approach, in how the rating agencies view securitizations, analysts noted. One investor, however, theorized that these actions were more a game of rating agency one-upsmanship, calling Fitch's move to downgrade without prior warning "a little aggressive" and adding that S&P had little choice to follow suit after its competition had made moves.
On Oct 18, Moody's Investors Service placed 23 classes of seven MMT deals on negative watch, citing "concerns about future utility of the credit card accounts if future purchases could not be funded by the B1 rated parent," as well as the portfolio performance.
Fitch Ratings, which last Monday downgraded 21 classes of seven outstanding transactions - without first placing the bonds on watch - cited concerns with Metris, rather than its master trust. Fitch said it stressed for problems facing the parent in funding receivables growth, a concern that has been in the market since regulators restricted its ability to fund via brokered deposits earlier this year.
"Fitch's concern that Metris would be unable to fund new purchases on the trust's designated accounts in the event of insolvency, bankruptcy, or receivership. After reviewing these stress scenarios, Fitch believes available credit enhancement is no longer commensurate with the previously assigned ratings."
Standard & Poor's cited deteriorating trust performance in its ratings watch placement. "Deterioration has been more pronounced during the past six months, as the trust has reported increased delinquency and charge-off rates," adding "the lower base rate costs have not been able to wholly offset the trust's increased charge-off rates."
Following the Fitch downgrades, JPMorgan Securities told investors: "More stringent purchase rate stress reflects heightened concerns that Metris would be unable to continue receivables purchases." Friday Oct. 25, Morgan Stanley researcher Amol Prasad ran stress scenarios assuming a zero percent receivables purchase rate and found that while the A class bonds were sheltered, B class paper faced 16% cumulative losses and C class holders "lose 100% of their principal if none of the receivables are replenished," under Morgan Stanley's generic stress.
While Metris will have to begin trapping cash if excess spread levels, currently at 5.73%, dip below 5.50%, its saving grace may be the persistently low interest rate environment. Most anticipate a 50 basis point easing following this week's Federal Open Market Committee meeting, further boosting MMT excess spread.