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More Credit Card Issuers Scramble as Card Payments Lag

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  • More Credit Card Issuers Scramble as Card Payments Lag

    Asset Backed Alert, Harrison Scott Publications Inc. (March 6, 2009)

    Deteriorating borrower performance has forced American Express, Citigroup and First National Bank of Omaha to divert cashflows from securitized credit cards into special reserve accounts - and more drastic moves could follow.

    The so-called cash trapping was triggered by a slide in excess spreads, the money remaining in securitization pools after bondholders have been paid. Under normal circumstances, those funds would be the issuers' to keep. But if excess spreads fall to minimums established in bond covenants, those cashflows must be set aside to create cushions against investor losses. Typically, those "triggers" are 4-5%.

    Amex trapped $1.5 million for two series of fixed-rate bonds in February, after the deals' excess spreads fell below a 5% threshold. Unless those spreads rebound, the lender must increase the reserve to $22 million. Citi started trapping cash on deals from its Citibank Credit Card Issuance Trust in January, when excess spreads dipped below a 4.5% minimum. Some deals from an older Citi trust were already trapping cash last year. First National Bank of Omaha, meanwhile, started trapping last month, when spreads on its First National Master Note Trust dipped to 3.8%.

    The maneuvers mirror those taken by several other credit-card lenders in recent months, as weakening consumer credit has sent ripples through securitization trusts. Ultimately, the issuers will want to restore their excess spreads, so they can resume pocketing the left-over cashflows....


    Average excess spreads among securitized credit card accounts declined to 5.7% at the end of January, from 6.4% in December, according to S&P (see article on this page). Oddly, BofA, which started trapping cash in November, was able to stop last month after its excess spreads rose independently of its discounting move.

    Meanwhile, investors are skeptical about the added protections offered by maneuvers like discounting and additions of first-loss pieces, both of which affect the structure of outstanding deals. They say that on top of serving as proof that a collateral pool is already under stress, such moves sound alarms that irreversible trouble could be on the way. "To me, you either know how to run the business or you don't," one buysider said. "We've always felt that, if you can't manage it well, then an extra 1-2% of yield doesn't change your risk."

    The thought is that there's only so much time an issuer can buy. If underlying asset performance continues deteriorating, issuers who were able to stop trapping cash may eventually have to do so again, or could even face early-amortization scenarios.


    There's only so much that a lender can discount its cashflows, however, as the tactic eats into lending capacity.

    Aside from those sorts of moves, most credit-card lenders have already sought to boost excess spreads through means that don't entail structural adjustments. For instance, many have cut off weaker borrowers, reduced credit lines, instituted higher standards for new accounts or hiked interest rates and fees.

  • #2
    Re: More Credit Card Issuers Scramble as Card Payments Lag

    U.S. credit card defaults reach 20-year high

    According to a report by Reuters, American Express and Citi were the issuers hit the most by the missed payments. AmEx said its net charge-off rate -- debts that companies deem as uncollectable -- grew to 8.7 percent in February from 8.3 percent in January. And Citi -- a prominent issuer of MasterCards -- cited a 2.38 increase in defaults, skyrocketing from 6.95 in January to 9.33 in February.

    However, two issuers -- Chase and Capital One -- reported credit card losses below analysts' expectations.