Richmond, Va.-based electronics retailer Circuit City Stores announced last week it would close 19 of its 636 stores, just as hedge-fund Highland Capital Management made a $3.25 billion bid for the company. Though an imminent takeover may not by itself mean bad things for the company's ABS, sources say more closings could impact the performance of the company's master trust.

Like many retailers with branded credit card lines, Circuit City sold its credit card operations to a larger entity. In early 2004, Bank One bought Circuit City's credit card operations, shortly before the bank itself was acquired by JPMorgan Chase. That means any immediate concern over account servicing is alleviated, since JPMorgan is one of the largest credit card servicers in the world. Circuit City also has two separate credit card lines, one with cards backed by Visa and MasterCard, and one private label card that can only be used at Circuit City stores. It is the private label card that could become a problem, sources said.

Last year, Circuit City announced it would close 19 stores. Last week the company announced the same number of closings, citing expense reduction as the reason for the shutdowns. "The risk is that if more stores close, some of the company's private label cards could experience a deterioration in performance," said Jeff Salmon, a director in the Barclays Capital U.S. ABS research group. The cards backed by Visa or MasterCard can be re-issued as regular credit cards, but the most of the private-label cards will likely stop being used.

Given standard loss and delinquency rates, there is naturally a percentage of Circuit City cardholders who may elect not to pay their balances. "What will the performance of the trust be" once some of those people stop paying their bills, asked Salmon. The threat of a buyout also adds to the uncertainty over store closings as any new management scheme could likely include cost cuts. Salmon indicated, however, that other than the store closing aspect, the takeover itself does not present a serious concern at this time. "From a credit risk structural perspective, there is nothing to worry about at this stage," he said.

Circuit City currently has four ABS deals still outstanding. Two are paying from its Circuit City Credit Card Master Trust, one each from 2002 and 2003, with original amounts of $300 million and $500 million respectively. It also has two deals through First North American National Bank that are still alive, one from 2002 at $470 million, and another from 2003 at $550 million.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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