In the wake of the near early amortization of the high-coupon, fixed-rate Chase Credit Card Master Trust 1996-3 ABS, investors are asking for more spread in return for this perceived new risk for credit card ABS. But as there was no early am, most analysts play down this threat, noting that current master trust technology makes the question anachronistic.
While spreads in the credit card sector have widened on regulatory fears, the debate is whether early-amortization risk is properly accounted for in credit card ABS.
"Some investors still have the impression that banks would prop up deals to prevent an early am," noted one wary investor. "But in the current environment, banks can not act in a way that would be viewed as implicit recourse' by regulators. Is it in a bank's interest to prop up a $500 million transaction, if it would lead to it having to take $30 billion back on its balance sheet?"
With the advent of the newest structure in the card sector - the master note trust - this is not a concern because excess spread is shared throughout all outstanding series. But in pre-2000 vintage
outstanding trades, the possibility exists of non-performance based
on early-amortization triggers. Additionally, the higher coupons of a bygone era prompt this paper to trade at a premium.
In the past, the practice of manipulating accounts in a trust has occurred. For example, Mercantile Credit Card Master Trust 1995-1 and Household Private Label Master Trust 1994-1 and 1994-2 each discounted receivables to support deals. Also, upon acquiring Chevy Chase FSB's credit card portfolio, then First USA Bank rotated in new accounts to support the deteriorating credit of the portfolio, notes Barclays Capital researcher Jeff Salmon.
While Salmon added that the practice of discounting receivables has since been outlawed - with the penalty of losing off-balance-sheet status for the entire trust - adding and removing accounts is still allowed, as long as it is a random sample of accounts. "Banks are not allowed to cherry-pick accounts and add them to a trust," he added.
Nomura Securities' Mark Adelson believes that while there is some risk for a non-credit-related early am, it is so small that investors should worry more about risks in other sectors of the ABS market. Calling the worry an investment community overreaction,' Adelson points out that the high-coupon fixed-rate transactions issued in the mid-1990's with exposure to this particular trigger make up a very small percentage of the sector as a whole and that any investors in new issue credit card supply need not have to worry about lower interest rates in the future squeezing excess spread.
"This is an issue-specific risk, rather than a sector-wide concern and the risk of serious damage to investors is less, or should be, than average life term volatility in the auto loan or home equity sectors," said Adelson.
With spreads in the credit card sector having approached levels flat to Libor in the first half of the year, however, the fear of regulatory scrutiny leading to a debacle is prevalent amongst investors of credit card ABS. Barclays' Salmon coined the phrase "Rambo regulators" in a recent research report and notes that in the current environment regulatory risk can be found in nearly every sector of structured finance markets.
With three-year new issue credit card spreads having made five basis points over one-month Libor this year and five-year supply in as much as 10 basis points over Libor, some analysts were calling for sub-Libor levels in the sector. Even with the recent widening trend, we are still better off than at the start
of the year. According to Banc One Capital Markets' Generic Offer
Side ABS Spreads, three-year triple-A card floaters are still 2 basis points inside year-to-date levels and five-year is one basis point tighter YTD.