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Synchrony boosts collateral cushion in first card ABS of the year

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The Synchrony Bank credit-card master trust is boosting levels of excess collateral in its first 2018 securitization of credit-card receivables, creating more cushion for investors as the bank and its parent Synchrony Financial (NYSE: SYF) cope with rising credit pressures in the retail sector.

The $648.1 million Synchrony Credit Card Master Note Trust 2018-1 features a $500 million Class A tranche benefiting from 27% subordination of the $47.9 million Class B notes and the $41.1 million Class C notes tranche.

What is lacks, however, is the subordinate Class D tranche that was included in Synchrony Bank’s previous asset-backed transaction last October. For the new deal, Synchrony has instead applied $95.9 million in excess collateral to boost the gap between the pool’s collateral and the issued notes’ face value to 14% from 5%.

The notes are backed from a pool of receivables sold to the trust from Synchrony’s managed retail credit card portfolio of $56.2 billion of private-label and cobranded credit-card accounts.

The cushion provides room for additional losses of receivables cash-flow without impacting note payment priorities.

Both Moody’s Investors Service and S&P Global Ratings have assigned preliminary triple-A ratings to the Class A notes in the portfolio, in a deal underwritten by RBC Capital, Citigroup and TD Securities.

The receivables are from retail card accounts owned by Synchrony, issued with cobranded and retail partners primarily in apparel, home improvement products and general merchandise stores.

Among them is the struggling department store chain J.C. Penney (NYSE: JCP), whose cards make up the second-highest volume of the receivables at 20% of the entire 2018-1 pool. The Plano, Tex.-based retailer shuttered 140 stores in 2017, although most closings were strategically aimed at legacy stores too small to accommodate the chain’s sales-growth projects — such as the inclusion of more Sephora cosmetic boutiques inside stores.

J.C. Penney has not announced major store closing plans for 2018. But even though over 56% of the rest of the receivables are tied to cards issued to investment-grade-rated Walmart (Moody’s Aa2) and Lowe’s (A3), Moody’s said there remain concerns that Synchrony’s spinoff from General Electric in November 2015 may yet hinder its ability to renew retail partnerships in the coming years.

The volume of cardholders with lower subprime FICOs (below 660) fell to 22% of the pool from 24% last October for the trust’s 2017-2 issuance. The average account balance was $829 (up from $778 from the last securitization), with an average credit limit of $4,312 and a utilization rate of 19.2%.

As of Jan. 31, the trust pool had $11.8 billion in receivables from about 14 million accounts. All of the accounts are over five years of age.

Annualized net losses have ranged from 5.11% (2016) to 5.83% (2012) in the last six years; the net loss rate was 5.22% in 2017. Thirty-day-plus delinquency rates have fallen from a high of 3.89% in 2013 to 3.01% last year.

Despite the declines, S&P said retail industry uncertainty clouds the sector’s outlook as the agency assigned a base-case net loss assumption of 8.5% on the 2018-2 pool — more than 330 basis points above the average trust loss rate average of 5.18% as of January 2018.

“Our base case reflects our view that loss rates could spike quickly in this pool during the revolving period due to a rapid shift in the retailer composition,” S&P’s presale report stated.

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Credit card ABS Synchrony