Despite a heap of headline risk, Providian Financial Corp.'s outstanding securitizations, from a credit perspective, are well padded in the near-term, and most analysts do not anticipate any type of ABS-related credit event or early amortization.
The company hit the mainstream news when it told shareholders that it anticipates future losses associated with its risky consumer loans, a red flag to ABS investors. Providian reported a slight rise in its net credit loss rate to 10.33% from 10.29% in the second quarter. Delinquencies also rose to 8.66% from 8.04%.
According to analysts at Standards & Poor's, there is no cause for immediate rating action, as excess spread, particularly on the non-prime Gateway Master Trust series, are at healthy levels, approximately 8.7% on a three-month average. Further, the Gateway deals are all wrapped to a triple-A by the monoline insurance companies.
In fact, said analysts, excess spread is far thinner on some of the earlier, fixed-rate deals off the Providian Master Trust, backed by prime accounts. Accordingly, Providian has been siphoning excess collections from some of its well-padded floating-rate trusts to better enhance the fixed-rate deals. This excess collection would have otherwise gone to Providian as cash, analysts said.
Two of these fixed-rate transactions reach maturity next year, at which point the excess collections will either flow to Providian or serve as excess loss protection in the floating rate deals.
Further, noted Barclays Capital in a write-up last week, the floating-rate series will continue to benefit from dropping interest rates, with Libor dropping 100 basis points in its October reset.
Still, Barclays also notes that, if the Gateway and other trusts do in fact deteriorate significantly next year, their ability to provide excess padding to the fixed-rate deals will lessen.
"Without continued remedies to enhance trust performance, we believe the likelihood of triggering an early amortization event of the fixed-rate series, especially PNBMT, Series 2000-1, will increase, especially as loss rates are expected to rise significantly in 2002," writes Barclays' Jeff Salmon in his report.
S&P director Joseph Hahn maintains that, although the excess spread on the Gateway Trust is robust, into the economic slowdown, "The Gateway program seems to be the greater unknown."
Providian said that it will suspend lending in the highest risk segment of the "standard" market, which is subprime.
Disclosing the worst
While the trusts themselves are in good enough shape to withstand credit watch, the longer-term picture is slightly less certain because of the servicer risk associated with Providian's financial strength. Some Street analysts have predicted Providian will be acquired by a larger entity, given its sharp drop in market valuation.
Since its earnings announcement on Oct. 18, Providian's stock plummeted from nearly $13 to less than $4 per share. The company's 52-week high was $64.06.
Providian's announcement and stock devaluation brought down stocks of fellow credit card issuers, including MBNA Bank, Capital One and Metris Companies.
On the flipside, market sources told ASR that ABS bonds from other issuers, especially from top-tier MBNA, have actually received a stronger bid since Providian's earnings report.