By selling Washington Mutual's credit card portfolio to JPMorgan, early amortization on WaMu's credit card securitzations has been averted,according to analysts from Barclays Capital.
Analysts asked the question:When is an early amortization event not an early amortization event?
"When an insolvent thrift is bought out of receivership before the ink on the press release announcing the receivership is dry," they wrote in a research piece released late Friday. "We obviously state this tongue in cheek, but no sooner had the Office of Thrift Supervision (OTS) announced it closed Washington Mutual (WM) and placed its bank subsidiaries under receivership by the Federal Deposit Insurance Corp. (FDIC), then JPMorgan agreed to purchase the operating assets of WM, including deposits, other assets, and the thrift's loan portfolio."
Based on Washington Mutual Master Note Trust (WMMNT) documentation, it said that "the occurrence of certain events of bankruptcy, insolvency, conservatorship, or receivership of the issuer" constitutes an event of default that is remediable by early amortization, Barclays said.
The transaction documents also said that the occurrence of some events of default involving the bankruptcy or insolvency of the issuer results in an automatic acceleration of all of the notes. This makes appear, according to analysts, that the WMMNT and PMNT shelves technically hit an event of default that should cause early amortization of the trust. But, it also appears that the regulators are regarding these events a change of control, where WaMu sold its loan portfolio and other assets and certain liabilities to JPMorgan, analysts said.
There is a historical precedent for FDIC to be reluctant to start an early amortization, noted Barclays.
Under the NextBank 2002 receivership, FDIC delayed the onset of early amortization of the NCMNT credit card ABS and cited its desire to sell the card portfolio to maximize value for depositors.
Considering the sale of the full portfolio to JPMorgan, it is probably that the FDIC is willing to give WMMNT a pass on this technical event of default. While senior noteholders generally gain
from an early amortization (the exception are holders of notes scheduled to mature shortly after the early amortization event), subordinate noteholders are probably going to be more exposed to
losses. However, the purchase by JPM is a positive to all noteholders, Barclays said.
They added that WMMNT could benefit from the stronger credit card servicing and underwriting expertise of JPM, whose Chase Issuance Trust (CHAIT) has had the most consistent performance of all the bank card master trusts in this market downturn.
Servicer risk that was present with WaMu is now removed as the better capitalized JPM stands behind the deals' servicing. From a ratings perspective, the outstanding notes should gain from the strength of JPM as the new parent company. Standard & Poor's and Moody's Investors
Service said WaMu's weakness as an important factor (along with weak collateral performance) in their recent downgrades on outstanding WMMNT and PGMT classes.
As excess spread stays weak, considerable increases in charge-offs could lead to a performance-based early amortization event, Barclays said. WMMNT's 1M excess spread has dropped to less than 4%, and the principal payment rate has fallen to 7%, whicha are the weakest metrics for any credit card master trust that Barclays tracks, including retail/private label trusts.
The one positive, according to Barclays, is that yields are still high relative to other bank card master trusts. But, with 48% of the collateral pool comprised of borrowers with FICO scores less than 660, one might expect to see even higher yields through effective use
of risked based pricing to pay for the weak credit quality of the borrowers.
Nonetheless, analysts think several mitigants are there to counter weakening performance and the risk of early amortization. They think it is probably that JPMorgan will let the subprime portion of the WaMu portfolio run-off, resulting in better quality receivable remaining in
the trust.
JPMorgan will probably take an aggressive look at cardholder terms in the WaMu card portfolio, said Barclays, and adjust credit limits and APRs where its feasible and appropriate.
Additionally, as of June 30, WaMu had about $10.6 billion in unencumbered credit card receivables on its balance sheet. Analysts said that to the extent that the performance of these receivables is better than that of the master trust, JPMorgan could add these to the
master trust to boost credit quality.
Any new originations would probably be also underwritten to JPMorgan standards so future account additions would likely improve the portfolio's credit quality, Barclays said.
