Moody's Investors Service today proposed updating its criteria for rating securitizations backed by credit card receivables and revolving consumer loans to “more explicitly incorporate the effects of a sponsor default”.
Adding more emphasis on the credit quality of the sponsor reflects Moody’s expectation that an insolvent sponsor is more likely than a solvent sponsor to close accounts in a distressed portfolio, analysts at the agency said in a report.
“In early amortization, a securitization no longer funds new purchases and a sponsor in financial distress or in default will likely have difficulty funding new card receivables through other sources; therefore, the sponsor will likely need to revoke cardholders’ charging privileges,” the analysts said.
Over the last several years, five sponsors in financial distress closed all of the credit card accounts in six transactions that were performing poorly. Moody’s said that in each case, the shutdowns led principal payment rates and yields to drop, while charge-offs rose. The reason was “cardholders’ incentive to repay their balances declined materially when their charging privileges ended,” the analysts said.
Under the revised approach, Moody’s would adjust the level of credit enhancement that is consistent with a bond rating based on the senior unsecured rating of the transaction’s sponsor. This would better reflect the risk of the sponsor becoming insolvent and closing down a distressed credit card portfolio as a result.
"In our proposed methodology, our rating analysis starts with a cash flow model in which we assume the closure of all credit card accounts in the portfolio; we will then reduce the resulting credit enhancement based on the sponsor's rating," said Moody's senior credit officer Luisa De Gaetano in a press release. “By contrast, in the current methodology, although the level of credit enhancement also depends on the sponsor's rating, we arrive at it indirectly via our assumption on the purchase rate."
The proposed changes will have little or no effect on the ratings of most senior notes of outstanding credit card or revolving consumer loan ABS, according to Moody's.
For the outstanding subordinated notes in these transactions, rating changes of up to three notches are possible, with upgrades more likely than downgrades.
However, Moody’s warned that securitizations with “very low levels of credit enhancement, comparatively short amortization periods (defined as the time between the expected maturity and the legal maturity), and trust structures that do not prescribe the sale of receivables at the legal final maturity of the notes,” might experience downgrades of up to three notches for both senior and junior notes.