Don't write off the charged-off credit-card sector of the ABS market.
Because the charged-off sector represents 5% of the $450 billion revolving credit-card business, the future of the market is secure, said panelists at International Management Network's securitization conference in Bermuda. But whether or not securitization will thrive in the sector hinges upon a deeper focus on servicing, smaller deals, further disclosure from lenders, and an increase in buysider education.
While the fraud debacle at Commercial Financial Services has largely choked off issuance from the charged-off credit card securitization market, the sector is still managing to breathe, said panelists, surviving mostly by issuing small commercial paper and private placement deals.
Three such deals have trickled into the pipeline recently: a $30 million plus transaction that Prudential Structured Finance Group is looking at buying, a $15 million financing from Arrow Financial Services, and a transaction of undisclosed size for ExTerra Credit Recovery.
The existence of the smaller deals is heartening, said Michael Bozzo, vice president at Prudential, because the key to avoid getting stuck with bad bonds is to know who wants notches on their bedpost and who wants to get customers paying again.
"CFS-size deals are a thing of the past," Bozzo said. "Nobody's going to be doing the volume they did. The important thing now is to gauge who is going purely for growth and who's looking ahead to collection."
CFS, achieving astronomical growth from securitizing large chunks of its card collateral, was placed under investigation and filed for bankruptcy protection last year after an anonymous letter warned ratings agencies of fraudulent accounting regarding the sale of credit card receivables to a company CFS had a stake in.
While Bozzo still sees the potential for growth from CP-focused issuers outside of the conduits, Michael Valentino, chief financial officer of Arrow Financial, does not yet find that financing outside of the commercial paper arena is an economical option for companies like his.
"Term financing is tough," Valentino said. "It's hard to get enough critical mass."
This is in part due to the critical eye developed in the market for purchasing this collateral after the CFS disaster. But all the panelists said that disclosure on the part of lenders needs to improve.
"The key to the business I think is getting the credit grantors to give you good info," said Bruce Adams, chief financial officer at ExTerra.
ExTerra was rumored to be on the path to growth, possibly looking toward the term market for financing down the road, but Adams said his cost of funding is more suitable to the commercial paper market. That said, he would not rule out the idea. ExTerra currently has $50 million in a revolving facility that can go up to $100 million.
Bozzo said that the keys to these deals are in both the servicing and the collateral, as they are inextricably tied to one another, but that in the end, the servicing is the linchpin, because it is what will provide the revenue stream.
Sean Sheerin, vice president at Duff & Phelps Credit Rating Co., agreed, saying that opportunity exists within the collateral, because his shop's data bares this out.
"These folks can be rehabed," Sheerin said. "We value some of these accounts at 60%."
In fact the main problem may be getting the buyside to come back to the table after all the bad headlines.
"People don't always have short memories," said an expert in the sector. "There's a need for education about the collateral."