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Kroll considers downgrades for $730M in subprime card ABS

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Kroll Bond Rating Agency is taking another look at recent securitizations by four non-prime credit-card issuers over concerns of the broad economic impact of COVID-19 contagion.

In a release Tuesday, the ratings agency said it was reviewing a potential downgrade to nearly $731 million in notes across four ABS credit-card transactions issued in the past two years.

The deals – including a $300 million issuance priced in February – are all backed by receivables on credit cards issued to consumers with less-than-stellar credit.

The concern is twofold. First is the whether massive job losses since March will disproportionately impact the ability to repay for the issuers’ subprime and near-prime band of customers (generally with FICO scores under 700); secondly, whether borrowers in good standing will even have the option to use their cards – private retail-branded cards, in particular – under state quarantine rules that have temporarily shuttered most non-essential, brick-and-mortar retailers nationwide.

“[Kroll] expects the rise in unemployment to inevitably impact credit card performance including higher charge-off and lower payment and new purchase rates,” the agency stated in a release.

The four credit-card securitizations placed under review include:

· a 2019 issuance of Mastercard-branded receivables sponsored by Continental Finance totaling $127.6 million

· a 2019-vintage, $135.9 million master-trust bond sale backed by private retail card receivables from “second-look” point-of-sale finance company Genesis Financial Solutions

· the $300 million Fair Square Issuance Trust 2020-A offering priced two months ago by Fair Square Financial for receivables of MasterCard cards serviced by CardWorks

· a $167.3 million notes offering sponsored in 2018 by Atlanticus Holdings Corp., which issues installment and revolving credit cards under its Fortiva retail credit-card program

Kroll is considering downgrades to a dozen senior and subordinate ABS notes for three of the issuers (Continental, Genesis and Fortiva), all of which may lose their single-A bond rating for their Class A notes that have top priority for principal and interest payments of card receivables directed to their trusts. A one-notch downgrade to BBB would maintain the Class A notes' investment-grade status.

For Fair Square, Kroll is limiting the review to the three junior Class B, C and D note tranches in its 2020-A transaction, ranging from BBB to B. Fair Square’s $181.5 million Class A notes will maintain their single-A rating regardless of the outcome of Kroll’s newly announced review.

Kroll noted each transaction showed strong performance levels in April servicer reports, but the agency is applying new base-case assumptions on the very poor near-term macroeconomic conditions from the pandemic and “the ability and willingness” for consumers to pay lower-priority, unsecured consumer debt amid the pandemic crisis.

The agency also reported that the issuers and servicers have begun to receive – and grant – disaster hardship deferrals on accounts and waiving late fees for borrowers impacted by COVID-19.

“These actions may slow payment rates, delay defaults, reduce portfolio yield through lower interest and fee income and distort actual trust performance until the number of deferrals declines and/or such deferral plans reach their limits,” the report stated. “Additionally, many issuers are reducing origination volume and credit line increases in the near term, which will likely affect servicer financial condition.”

While credit-card ABS performance may be temporarily boosted from benefits of the $2 trillion CARES Act (“Coronavirus Aid, Relief, and Economic Security”), the report added, “it’s unclear how long these positive performance trends will last.”

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Credit card ABS Downgrades
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