The acquisition of monoline credit card issuer MBNA Corp. by banking mammoth Bank of America likely means MBNA credit card ABS issuance volume will decline significantly, pulling precious volume out of an already floundering sector, sources say. Last Thursday, Charlotte, N.C.-based BofA announced it would acquire MBNA for $35 billion in cash and stock.
MBNA currently has about $80 billion in credit card receivables with roughly $70 billion of that financed through securitization. BofA, while a highly capitalized commercial bank with its own portfolio of credit card receivables, has not issued a credit card deal since 2001, leading many to believe that MBNA's days as a prolific issuer of ABS are over. While it is unlikely that MBNA will completely disappear from the ABS market, sources say it is almost certain to issue less credit card ABS as it will have ample access to funds through its new parent. BofA also carries a higher corporate debt rating, at double-A minus, than MBNA at triple-B-plus.
"Now [MBNA] will have more options and an even lower cost of funds," said Jeff Salmon, a director in the ABS research group at Barclays Capital. "In all likelihood you will see securitization volumes drop off," he added. After BofA acquired FleetBoston Financial Corp., also a credit card ABS issuer, in October 2003, Fleet has disappeared from the market. However, Salmon and others say the chances that BofA will completely pull MBNA out of the ABS market are remote.
"Given the size of the portfolio, BofA will have to securitize but it will mean less issuance," said one banker. "BofA has a different approach," he added. Salmon said it is important for MBNA to maintain a presence in the securitization markets so that investors stay familiar with the entity as an issuer and it can continue to get advantageous pricing.
While it is accepted throughout the market that new issuance will decline, there remain mixed views about what will happen to spreads on MBNA's existing deals. "MBNA ABS investors will gain as we expect this paper to tighten in on bank-issued credit card ABS," according to Peter DiMartino, managing director with RBS Greenwich Capital. Salmon, on the other hand, believes spreads will be unchanged as MBNA paper already trades at tight spread levels and is considered a benchmark issuer in the sector.
The acquisition follows a long trend in the credit card market as smaller scale, independent credit card issuers, many strapped by tapering volume in the market, are acquired by large commercial or investment banks. Last month mortgage lender Washington Mutual Inc. acquired Providian Financial Corp., a finance company with an $18.1 billion nonprime credit card portfolio.
The consolidation wave in the general-purpose credit card market traces its roots to the mid-1990s and is seen as the reason behind the marked decline in credit card ABS issuance this year. The picture is not expected to brighten any time soon. Credit card issuance makes up only 6% of ABS issuance now, versus 20% five years ago, according to data from RBS Greenwich. The more highly capitalized banks swallow once-prolific credit card ABS issuers, the less issuance there will be in the sector, as those entities do not need to use the securitized market for funding.
"Unless there is a strategic change by BofA in financing these [credit card] assets, this acquisition could take additional supply out of the ABS market. This could exacerbate a technical squeeze already taking place in the market for credit card ABS. For these reasons, the acquisition could be a net negative for credit card ABS investors going ahead," wrote DiMartino.
David Hendler, analyst with Credit Sights, said in a report that American Express and Capital One Financial are "in play" as the next likely consolidation targets, as the trend is widely expected to continue.
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