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Scotiabank deal stirs up moribund bank-card ABS issuance

Credit card securitization has declined in volume over the last two years, with noticeable absences from regular ABS issuers like JPMorgan Chase and Citigroup last year.

But Bank of Nova Scotia is still churning out deals through its master trust, with the launch of its first 2020 deal.

According to presale reports, Scotiabank is planning a U.S.-dollar denominated bond sale (size to be determined) backed by the Canadian-dollar receivables from personal and business credit accounts originated and serviced by the Canadian institution.

It will be the fifth issuance from the Trillium Credit Card Trust II since 2018.

The Series 2020-1 issuance includes floating-rate Class A notes that have received preliminary triple-A ratings from DBRS Morningstar, S&P Global Ratings and Moody’s Investors Service.

Credit enhancement for the senior notes, which will have an expected principal repayment date of December 2021, are provided by the subordination of Class B and C notes totaling 8%, excess spread from receivables and, if necessary, a cash reserve account. According to presale reports, the reserve account will be funded up to 5% of the initial invested amount should excess spread fall below certain expected levels.

The trust will use the proceeds from the note sales to purchase co-ownership interests in certain accounts from Scotiabank’s CAN$4.7 billion managed portfolio of Visa, Mastercard and American Express receivables (as of November 2019).

For the first 11 months of 2019, Scotiabank had monthly payment rates of 44.2% on the accounts – meaning that principal on nearly half of the accounts are fully paid down by borrowers each month. "A high payment rate is indicative of high credit quality obligors who use the cards more for convenience than credit," stated Moody's presale report.

"For ABS investors, the higher the payment rate, the greater the likelihood that principal would pay down in a timely manner in an early amortization scenario," the report added.

Gross yields are approximately 25%.

Scotiabank’s issuance is the first for the U.S. credit-card ABS market which had a volume decline of 34% in 2019, when only $24 billion was added to the credit-card ABS supply despite a roll off of $45 billion in maturing credit-card ABS paper. “Credit card volumes fell off the cliff in 2019,” a recent report from Kroll Bond Rating Agency said.

Kroll said the lack of supply last year was “driven by the absence” of Chase and Citi “as well as large reductions in supply from American Express … and Bank of America,” adding that it “appears that issuers have preferred using their cheap retail deposits to fund their card business rather than tapping the ABS market.”

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