Chase Manhattan Bank N.A. announced last week that it had received majority bondholder approval to amend its credit card master trust. This allows the sharing of excess spread, therefore limiting the early payout risk for three high-coupon, fixed-rate series. While raising questions as to its overall effectiveness (see ASR 5/26/03), the move is viewed as an example of an issuer protecting bondholder interests, without raising regulatory suspicions of implicit recourse and whether or not the assets truly are off-balance sheet.
As of 5 p.m. last Wednesday, when the solicitation period ended, the issuer had received consent from 64.7% of 1996-3 holders, 82.2% of 1996-2 holders and 69.7% of 1999-3 holders. Chase had only needed 50% consent from holders of notes in each trust. The final step to allow trust-wide sharing of excess spread is for rating agencies Fitch Ratings, Moody's Investors Service and Standard & Poor's Corp. to send confirmation letters to the issuer, "that adoption of the proposed amendments will not result in a reduction or withdrawal of the respective ratings for each of the three series," according to JPMorgan Securities researchers.
The proposal came to be a source of debate over the past year, as the three series in question flirted with breaching the negative excess spread threshold that would trigger an early amortization. The dilemma of an issuer taking steps to protect ABS holders at the risk of possibly being forced to take the entire trust back onto its balance sheet was debated in Street research and industry press reports.
The situation came to a head late last month, as Chase prepped to disseminate the investor consent forms needed to amend the trust. Morgan Stanley's Amol Prasad published a report theorizing that under certain circumstances, the proposed spread sharing could not prevent an early payout event.
At least on investor took issue with the Morgan Stanley research, saying, "Even if Morgan Stanley's doomsday scenario were to occur, an early am would not necessarily be the result," one investor said, pointing out the overlooked fact that sharing of excess spread is retroactive to May 1. "Since May's excess spread would be revised to 1.14%, June's number would be 0.54% and then July excess spread -0.96% (no sharing available), making the three-month figure 0.24%," he added.