Two prominent ABS research teams tackled the credit card sector last week as Lehman Brothers touted Discover Bank's ABS as a refuge of value after its spreads widened on reports of a corporate spinoff, and Morgan Stanley dissected various issues at credit card issuers GE Capital, Capital One Financial and the Bank of America-owned Fleet trust.
Last month, Morgan Stanley announced it would pursue a Discover credit card unit spinoff, prompting Moody's Investors Service to place 49 of Discover's bonds on review for a downgrade. As a result, spreads on Discover's triple-A rated paper widened 10 to 12 basis points, according to Lehman's calculations. With the notes at those soft spread levels, Lehman says it is time for investors to jump in. "We believe the significant spread widening on Discover credit-card ABS is unwarranted. Spreads should remain soft in the near term due to uncertainty, but investors should look to buy on weakness," Lehman said in a report.
Lehman pointed out that Discover has the capabilities to support its ABS with any additional credit enhancement Moody's may require. "We expect Discover Bank to take steps, if needed, to remedy the negative ratings situation by increasing credit enhancement levels within the trust," Lehman writes. One way Discover could do this is by setting up a reserve account to trap excess spread, an option that Lehman sees as feasible for Discover. The company will also become an attractive acquisition target when and if the spinoff is completed and a takeover by a more highly-rated entity would decrease the company's seller-servicer risk and alleviate the enhancement issues.
Morgan Stanley also offered its perspective on credit card issuers Capital One, GE Capital and Fleet. According to Morgan Stanley, the pricing on GE's recent series 2005-1 deal "demonstrates investors perception of GE as a strong corporate parent." The deal's triple-A and triple-B tranches priced only one basis point outside of the most recent American Express deal. the fact that GE can price a deal so close to Am Ex shows demand for GE credit card paper is increasing, Morgan Stanley analysts added.
New home equity issuance is expected from Capital One after the former monoline credit card company acquired New Orleans-based retail bank Hibernia Corp. in March. The Hibernia acquisition has allowed Capital One to diversify its holdings into new products and given it a "more bank-like profile," as Hibernia had a $15.7 billion loan portfolio at the time of its acquisition. Though Morgan Stanley projects more home equity issuance, some researchers have said Capital One's need to securitize its credit card portfolio may decrease as a result of the increased access to funding (see ASR 3/14/05). Morgan Stanley did not comment on its projections for Capital One's credit card issuance.
Finally, Morgan Stanley wrapped up its credit card issuer review with a brief look at the future of Fleet ABS, noting that BofA, which acquired Fleet last year, stopped adding receivables to the Fleet trust after the merger. Citing Fitch Ratings analysis, Morgan Stanley said gross chargeoffs spiked this month due to a declining receivables balance, however, losses did decline slightly during this period. Morgan Stanley said it does not believe BofA will add receivables to the Fleet trust, but that it will monitor the trusts performance in order to prevent a trigger or an early amortization event.
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