In the wake of credit enhancement reductions to one of Chase Manhattan Bank, N.A.'s credit card trusts, analysts with Citigroup Global Markets are predicting other credit card issuers are likely to seek similar reductions soon. "Given that one issuer has had its credit enhancement reduced, others are likely to pursue a request for credit enhancement reduction," said Citigroup analyst Mary Kane.
Credit enhancement levels for Chase's CHAIT trust class A notes were reduced to 13.5% from 14.5% and to 6.75% from 7.5% for the class B notes. Until the cut, Chase's enhancement levels had been somewhat high compared to other comparable quality trusts. The cut now brings Chase's class A notes more in-line with other major credit card issuers such as Bank of America, N.A., also with 13.5% senior enhancement. Banks such as Discover Bank and National City Bank each have 12.5% credit enhancement for their class A notes, with Citibank Credit Card Issuance Trust at 12.25% and Household Affinity (HSBC Bank) at 10% for the A class.
While the class A levels are still in-line to high compared to other comparable trusts, Chase's Class B enhancement levels are among the lowest in the industry, with only National City at 6.5%, Household Affinity at 5% and Citibank Credit Card Master Trust at 5% with lower class B enhancement levels.
Chase is the first delinked master trust issuer to take advantage of terms in trust documents that allow issuers to change required credit enhancement without note-holder consent. Prior to such action, issuers must get confirmation from each rating agency that rates its outstanding notes that the change will not result in adverse ratings actions.
Issuers such as MBNA America Bank and Capital One Financial could be the next ones to request enhancement reductions. MBNA's unsecured credit rating will soon be in the same league as other double-A rated money-center banks once the Bank of America acquisition is complete, notes Kane. That could significantly aid the bank's case when it approaches the rating agencies for approval to cut its enhancement levels. In Capital One's case, Kane points out the rating agencies have already viewed the bank's acquisition of Hibernia Bank positively, as Capital One will gain a broader source of funds and greater liquidity through the deal.
The key driver of the enhancement cuts, however, is trust performance, which, for the most part in the credit card sector, has been positive in the past year. "Every issuer has slightly different performance, but credit cards have performed extremely well," said Kane.
While investors never like to see credit enhancement levels reduced, the enhancement cuts alone will probably not be enough to spook investors into dropping the securities or shying away from new issues, sources say. Once again, it is trust performance that will be the key determinant, and, at least in the case of CHAIT, investors seem to be satisfied, the source added.
Kane said the fact that rating agencies are approving credit enhancement cuts reflects their increasing comfort with the performance of some credit card trusts. "This really signifies the maturing of the sector," summed Kane.
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