The pricing of the $750 million credit card securitization from The Metris Companies last week was complicated by the "credit tiering" currently seen in the market, a trend that has been seen increasingly in securitization markets and one that is not expected to be slowing down any time soon.
"We are continuing to see credit tiering for some consumer finance companies. Investor perception is different for us (Metris) than it is for a name like Citibank," said Scott Fjellman in the securitization department for the St. Louis Park, Minn.-based credit card issuer.
This tiering has resulted in what one secondary trader dubbed a "divergence in credit" accounts for a disproportionate widening of similarly rated paper of comparable tenor. For floating-rate notes, the disparity is up to two basis points but for fixed-rate paper it is as much as a five basis point difference.
Speaking of the spread difference between Metris and an issuer such as Citibank, others noted the credit quality of the receivables in the pools. "That's subprime," one analyst said. "There's a lot of other triple-A credit card paper out there that's much higher quality (then Metris), so they're going to have to pay a pretty substantial spread premium to get it done. Otherwise, why not go with something safe? - Why bother?"
But the spread disparity seen in triple-A-rated paper is too great to ignore, with senior Metris paper trading more in line with MBNA subordinated paper than any major credit card issuer's similarly rated comparable issues. MBNA's recent pricing of $250 million of five-year A-rated class B notes priced at 37.5 basis points over one-month Libor, while the AAA-rated seniors priced at 12 over Libor.
Five-year issues this year from American Express, Citibank, Discover Card, First USA and National City Bank all priced within 12 to 16 basis points over one-month Libor. The sector's top name, Citibank, priced with a coupon of 14 basis points over three-month Libor, a slightly different index that can account for a disparity of up to two basis points, analysts said.
By contrast, the private-label securitization from headline-risk plagued consumer finance concern Conseco Inc., backed by a pool consisting largely of home improvement store-originated receivables and small recreational vehicle loans, priced with a coupon of 28 basis points over one-month Libor.