[By Susan C. Knapp, vice president/senior credit officer, asset-backed group, Moody's Investors Service]

International credit and debit card vouchers are created when a cardholder uses a credit or debit card issued by a bank or other financial institution domiciled in his or her country of origin to pay for goods or services, or to obtain a cash advance, in a different country. A local financial institution in the country where the cardholder is travelling, usually a bank (the "processing bank"), then acquires the vouchers from merchants and submits the vouchers to a credit card clearing network such as Visa and/or MasterCard for payment. Banks such as Banamex, Bancomer, Banco de Credito del Peru, Turkiye Garanti Bankasi A.S., and Akbank T.A.S., have financed those voucher purchases by issuing securitizations backed by the present and future rights to receive such payments (also referred to as receivables throughout this report). In this article, we will explain how Moody's rates those transactions, and how properly structured transactions can, with certain exceptions, pierce the local currency rating of the originator and the country ceiling for foreign currency bonds where the originator is domiciled.

Moody's analysis of these transactions focuses on the originator's ability to generate receivables historically; the historical volatility of the flows, both for the originator and for the market; the originator's past, current and projected market share and any factors that might affect it, such as the competitive environment; and the impact that the macro- and micro-economic and political environment where the originator is domiciled might have on the generation of international credit card receipts.

Assuring Cash Flow to Transactions

Credit card associations such as Visa and MasterCard act as clearinghouses for their member banks in settling receivables charged on their respective credit cards. Visa and MasterCard have the obligation to make payment to the processing bank whether or not they are paid by the cardholder or issuing bank. The sale of the receivables does not alter the processing bank's entitlement to this indemnification.

In addition, Visa and MasterCard do not net the receivables against amounts owing from the processing bank as card issuer, and Visa and MasterCard must waive their right of set-off against the receivables to any amounts owing to them from the processing bank, except for certain incidental charges. As part of the transaction documents, Visa and MasterCard commit to remit any payments owing to the processing bank to a special account established, usually in New York, for the benefit of bondholders.

Typical Transaction Structure

To date, most of the transactions involving the sale of future credit and debit card receivables have been structured along the following lines, using a master trust structure:

1.A cardholder uses a credit or debit card issued by a bank or other financial institution domiciled in his or her country to pay for goods or services, or to obtain a cash advance, in a different country.

2.The merchant where the purchase was made sells the voucher to a processing bank in exchange for a payment (usually in the local currency of the country where the merchant is located) equal to the face value of the voucher less an agreed discount or fee.

3.The processing bank that acquires the merchant vouchers transfers to an offshore entity (e.g., a special purpose company or master trust) its rights to future international credit and debit card receivables of one or more identified card companies.

4.The master trust issues bonds, and the proceeds from the sale of the securities are used to purchase the receivables from the processing bank.

5.The processing bank irrevocably directs the credit card companies to pay all receivables to an offshore account in the name and under the exclusive control of an independent, third-party fiduciary.

6.The receivables are paid to the offshore account on a daily basis.

7.The fiduciary sets aside the requisite cash flow to pay scheduled debt service and - if specified performance criteria have been met - pays excess amounts to the processing bank.

Rating Considerations

Low Exposure to Sovereign Risk

When a government is experiencing a balance of payments crisis, it could institute measures either to maximize its receipt of foreign exchange generated by the entities domiciled within its jurisdiction or to prioritize the distribution of foreign exchange according to its assessment of the country's needs. Because the government has the right to limit access to foreign currency by entities domiciled within or otherwise subject to its jurisdiction, the foreign currency debt rating assigned to a national government usually represents the highest rating possible for foreign currency debt issued by those entities.

However, Moody's believes that the likelihood of a sovereign interruption of a transaction backed by credit-card merchant vouchers is low due to a number of factors, including the following:

*The receivables are created electronically upon the authorization of a debit or credit card transaction. The fact that this process is automatic and that there are a limited number of counterparties that perform this function (for example, VISA and MasterCard) limits a sovereign's ability to interfere with their generation and terms.

*The payment obligations are created offshore at the location of the card company. No cash flows back to the processing bank's host country, except funds in excess of debt service payments or unless approved by a fiduciary, limiting the ability of the processing bank's host government to repatriate funds because the credit card companies are not subject to its jurisdiction.

*The obligation of the credit card companies to make payments to the fiduciary agent is irrevocable and governed by New York (or other applicable foreign) law and subject to enforcement in the courts of that country. The credit card companies are therefore outside of the jurisdiction and control of the government where the originator is domiciled.

*The structure of the transaction limits the government's incentives to interfere. In many cases the majority of the cash flow generated by the receivables would be returned to the host country (i.e., the excess after the payment of debt service). Therefore, the government has little to gain by trying to divert that portion of the cash dedicated to debt service, since such attempts would likely be met with legal action by the bondholders and may result in a delay for the government in receiving any of the cash flows.

Gauging Receivables Generation Risk

The generation of the receivables by the processing bank depends on the use of cards issued by other financial institutions and the processing bank's ability to continue to acquire merchant vouchers from establishments that cater to foreign travelers.

The factors that most influence the processing bank's ability to acquire merchant vouchers include:

*Strong Branch Network - A strong branch network often enables a bank to pursue deeper business opportunities with merchants - merchants frequently have their relationship banks act as their processing banks because it is more efficient to deal with one bank rather than several. In addition, an extensive branch network, if it is accompanied by a large branch ATM network, can help a processing bank increase the amount of receivables it acquires through cash advances.

*Extensive In-place ATM Network - Does the bank have a significant, accessible, multilingual ATM network in strategic locations that cater to tourists and persons travelling on business?

*Low Competitive Environment - Moody's analysis focuses on the following questions in assessing the degree to which competition would make it difficult and costly to maintain or increase a processing bank's market share in the merchant voucher acquisition business:

*What is the basis for competition - pricing, service, or technological innovation?

*How many other financial institutions are active in this business?

*How have market share positions changed over time, if at all?

*Is the bank able to cross-market other services to attract and keep its merchant base?

*Does the bank have a strong presence in the target market for the acquisition of vouchers as well as other banking products?

*Relationship with the Credit Card Companies - Moody's reviews the bank's current and historical relationship with the card companies in an attempt to evaluate whether or not potential difficulties in the relationship might be resolved without resorting to an abrupt cancellation of the relationship.

*Other Factors - Moody's also considers factors such as how long the bank has been in the merchant voucher acquisition business, its profitability to the bank, and management's commitment to this business.

Cash Flow Analysis

Moody's approach to cash flow analysis is both quantitative and qualitative in nature. Moody's objective is to evaluate seasonality, trends, and volatility in the historical data and then to qualitatively assess the degree to which the historical data can be used as a predictor of the bank's ability to acquire receivables in the future. To this end, Moody's focuses on identifying the principal historical sources of the receivables (e.g., tourists vs. business travelers), the geographic regions from which they have been generated, and the types of establishments where the transactions have taken place.

In this analysis, Moody's evaluates potential changes in the macro- and micro-economic factors that could influence the overall generation of receivables in the country and the processing bank's acquisition of the related vouchers, including:

*The importance of the travel industry (including business travelers and tourists) to the country and the factors which might negatively affect it such as natural disasters, political turmoil, or a downturn in the business cycle.

*Is the country located near its largest trading partners, such as Mexico and the United States?

*Is there a stable political environment? What is the likelihood (and likely duration) of the occurrence of political violence, civil unrest, or terrorist acts that could discourage travel to that country?

*What is the likelihood and potential effect of natural disasters? Are there specific areas that are prone to earthquakes, hurricanes or other natural disasters?

*Are the cash flows seasonal? If so, it may be possible to mitigate the volatility risk inherent in seasonal cash flows through various structural protections.

Transaction Participants

The participants in a transaction of this nature include the originator, the card companies, the fiduciary agents - such as the indenture trustee and paying agent - and any third-party providers of enhancement. Moody's approach to analyzing the originator has been outlined above. With respect to the other participants, Moody's focuses on their credit strengths, experience, and ability to perform their obligations under the terms of the transaction.

In assessing the risk of any role played by unrated transaction participants, such as MasterCard (VISA is rated A1/Prime-1 by Moody's), Moody's considers the entity's duties under the terms of the transaction documents, its operating history, its market share, its historical relationship with the originator, the extent of the exposure to that participant, and the particular nature of any payment obligation. For example, MasterCard's ability to meet its payment obligation to a processing bank for the settlement of merchant vouchers is ultimately backed by the collective support of its member banks.

Structural and Legal Considerations

Moody's analysis of the structural elements of the transaction includes a review of the following elements:

*organizational documents and characterization of the issuer as a bankruptcy remote entity and, if a special purpose company, its ownership structure;

*the allocation of funds among the transaction's parties;

*the issuer's ability to issue additional future debt;

*the existence of performance triggers;

*covenants by the issuer and originator;

*events of default;

*the existence and terms of corporate guarantees or repurchase obligations;

*the existence of an offshore payment mechanism;

*the nature of the interest being transferred (e.g., ownership interest vs. security interest);

*legal opinions from local counsel regarding whether courts would recognize the sale of the receivables and prevent the originator's creditors from attaching them to satisfy their claims on the originator;

*the enforceability of each party's rights and obligations under the governing law of the transaction documents; and

*the existence and terms of any credit enhancement from a third-party credit provider.

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