Retailers and private label card issuers have increased issuance of ABS transactions in 2000 as corporate bond spreads in many retail names widened considerably in the second half. The challenging retail environment, downward revisions to earnings estimates by major retailers, and the potential for a slowdown of the US economy have made it difficult to issue new paper in the unsecured debt markets. As a result, supply of retail and private label credit card ABS in 2000 got a boost and increased substantially to total $4.7 billion, a 102% increase over the $2.3 billion issued in 1999. The biggest issuer was Sears, Roebuck and Co., which issued four deals totaling $2.9 billion from its master trust, SCAMT. Sears is the largest issuer of retail card ABS with $11.7 billion outstanding at year end 2000. There were $14.9 billion of retail card and private label ABS outstanding on December 31, 2000.

Issuance also got a boost from the refinancing of deals that matured this year. Spiegel Inc. came out of hibernation with a $600 million five-year, floating-rate deal issued out of Spiegel Master Trust (SPMT). Neiman Marcus Group Inc, a high-end specialty retailer, also re-entered the market in July with a $300 million, five-year floater issued from NMMT, which refinanced $300 million from Series 1995-1, which matured this year.

After a long absence from the ABS market, Federated Department Stores pushed its way to number three in terms of ABS outstanding with a $350 million, five-year, fixed-rate deal issued out of its Prime Credit Card Master Trust (PCCMT). The transaction was backed by receivables from accounts originated by large department stores such as Bloomingdale's, Burdine's and Macy's.

Within the retail card market there exists a dichotomy between sales volume and credit quality. If the program is chiefly used for marketing with the emphasis on sales generation, then retailers are more willing to compromise credit quality to achieve greater sales volumes. For some retailers, servicing and collections are usually done in-house to maintain control of the relationship and to use it as a marketing tool. Retailers are often cost-conscious and, in most cases, do not possess the data warehousing capability to do highly segmented marketing and underwriting as seen in a bankcard operation.

Private label issuers operate card programs for store clients that may not have the capacity or desire to manage their own portfolios. The private label companies typically have tighter credit underwriting standards than retail card issuers since they typically control and own the receivable balances generated by the credit cards they issue. Private label card issuers provide customized financing programs for national merchants and manufacturers across major industries such as apparel, furniture, home improvement and consumer electronics.

Retail card asset-backed securities structures are similar to those backed by general-purpose credit cards. In general, the analysis to assign ratings to retail and private label card ABS is similar to that used for bankcard ABS in that portfolio performance, seasoning, servicing capabilities and market share are factored in the analysis to determine triple-A, single-A and, triple-B credit enhancement levels. Retail card analysis differs in terms of the card's utility, issuer motivation and dilution experience. For example, a retail portfolio will typically experience a higher level of dilutions than a bankcard portfolio, because all retail purchases are subject to returns. Other considerations are servicer risk, payment rates, purchase rates and charge-offs.

Performance of Retail

vs. Bankcard

Portfolio performance of private label and retail card portfolios displayed improvement in the year 2000. Key portfolio performance measures, yield; charge-offs; and excess spreads fared better than most bankcard issuers. Specifically, charge-off rates have moderated and delinquency rates have shown some improvements. Some portfolio stabilization was realized as a result of tightened credit standards, change in credit terms and increased fees. The strength of the economy has also played a significant role in performance improvement. Due to factors such as the "wealth effect" created by the stock market, consumers have found the means to pay off outstanding balances faster and timelier. Payment rates have therefore shown marked improvement over the course of the year.

It is important to note that there is little correlation among the performance of retail and private label portfolios. This is due to the differences in the nature of the businesses and in the utility of the cards. For example, there is little relationship between the performance of the accounts within PCCMT (Federated) and CIRMT (Circuit City). PCCMT contains receivables that are generated from full line department stores. Hence, the payment pattern is similar to that of bankcard accounts. Circuit City credit cards, on the other hand, are used for the purchase of large ticket items, usually a one-time purchase of an electronic item. In this case the payment is similar to that of an amortizing loan instead of a revolving credit card. Therefore, payment rates will typically increase overtime as the account is paid down.

Additionally, as previously noted, there is also little correlation between the performance of retail cards and general-purpose bankcards. Although they may share similar characteristics, there exist differences in, among others, credit card utility, issuer strategy and motivation, and dilution experience. We have presented the performance of the top issuers of retail card ABS separately, as opposed to utilizing a retail card index. The bankcard index still provides a viable comparison as the competing sources of consumer credit (bankcard issuers) have put pressure on many retailers to maintain credit quality while preserving the cards effectiveness as a marketing tool. The following table provides a snapshot comparison among the performance of the top issuers of private label and the general-purpose bankcard industry.

The portfolio yield for retail card issuers is generally higher than bankcard issuers because of the higher finance charge rates and annual and nuisance fees. Unlike the bankcard industry, most retailers charge its cardholders the same finance charge rate instead of using a risk-based pricing approach for each account. Yield can also be more volatile given the unique financing options that are offered by retail cards. Additionally, "discounting" of receivables is a common practice for retail and private label master trusts. Discounting essentially reclassifies a percentage of principal collections as finance charge collections, which can boost yield 3 to 6% depending on the discount factor.

Monthly payment rates, the rate at which a cardholder pays off outstanding balances, are also more volatile for retailers and are normally at a slower rate than bankcards due to the diverse payment options and seasonal purchasing behavior. Retailers that allow cardholders to defer payment may experience very low payment rates. The financing of big-ticket items that are paid down over time can also push down the payment rate. Rates tend to be high when a cardholder opens an account simply to receive a discount on a purchase. Thereby, payment rates will be higher as these customers will be more likely to pay of the entire balances quickly.

Charge-offs, principal receivables that have been written off as uncollectable, are often higher on retail portfolios than those of bankcard portfolios. When retailers use card programs as a means to bolster sales, credit quality usually suffers. Like the bankcard sector, loss rates in retail card ABS have declined and display marked improvement as the large retailers have tightened underwriting standards in response to record personal bankruptcy filings. Moreover, competition from bankcard issuers has intensified.

Excess spread, the difference between yield and trust expenses, has been healthy for retail cards due to increasing yield income and decreasing charge-off rates. The three-month average excess spread levels for retail ABS are in line with and, at times, outperforms the average for the bankcard industry. For example, Target's Dayton Hudson Master Trust (DHMT) has consistently had the strongest excess spread levels (in the 14 to 16% range) of any retail and private label CCABS.

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