S&P:Strong US Credit Card ABS Volume For 2nd Half 2002

Despite the first half of 2002's U.S. credit card asset-backed securities market falling short of 2001's first-half volume, full-year volume should reach roughly $70 billion in 2002, up from $66 billion in 2001, said Joseph Sheridan, managing director of Asset-Backed Securities at Standard & Poor's.

"Issuance was down slightly in the first half," said Mr. Sheridan. "But a large number of refinancings coming off securitization in the second half should provide ample supply for the market." For 2002, refinancings of receivable portfolios backing maturing securities should total roughly $49 billion, up from $39 billion in 2001, Mr. Sheridan said. Approximately 60% of the total credit card refinancings will occur in the second half of 2002.

Bank One tops the refinancing list for transactions expected to mature in 2002 at close to $8 billion, followed by MBNA at $5.5 billion, and Citibank at $4.8 billion. New issuance will also be aided by the use of new master trust technology. Bank One joined Citibank and MBNA in May 2002 by adopting the de-linked master note trust structure as its primary issuance vehicle. The de-linked note structure, which improves issuers' flexibility and ability to respond to potential investors' reverse inquiries, also allows these banks to issue larger blocks of subordinated triple-'B' ERISA-eligible notes without having to issue senior classes at the same time. Standard & Poor's also expects that Capital One will set up a similar program and launch its debut issuance in the third quarter, said Mr. Sheridan. "The growth comes despite the recent spate of bad news to hit the card market," he said. Providian, Metris, CompuCredit, First Consumers Bank, and NextCard all made headlines ranging from reports of poor receivables performance and tighter regulatory scrutiny to Federal Deposit Insurance Corp. (FDIC) oversight and closure.

"The common thread between those receiving more attention this year versus prior years is that all of them dabbled in some way in subprime lending," said Bonnie Lee Tillen, a managing director in Standard & Poor's Structured Finance group. This year Providian sold its $3 billion prime portfolio to Chase and completed an innovative deal with Salomon and Goldman, selling off about $1.5 billion of its higher-risk segments.

NextCard, an Internet-only bank, captured headlines as the most interesting case for credit card ABS. When the NextCard situation failed to improve after the regulator suggested that NextCard reclassify its fraud losses as credit losses (leaving NextCard to lose eligibility for "low-level recourse treatment" for its securitization and become undercapitalized) in February 2002, the Office of the Comptroller of the Currency closed the bank and appointed the FDIC as receiver. Early amortization was expected following this, but the FDIC stated that the early amortization was not enforceable solely based on the insolvency or the appointment of the FDIC as receiver. FDIC sought a buyer in the interim but was unable to do so. And with the losses continuing to escalate, in early July, the FDIC announced the closure of all lines on outstanding NextCard accounts. That news was unprecedented and came almost simultaneously with the NextCard deals hitting rapid amortization on their own accord. In June the deals formally breached their three-month base rate trigger when the three-month excess spread dropped to negative 0.33%. NextCard Credit Card Master Note Trust's asset-backed notes series 2000-1 and 2001-1 were placed on CreditWatch with developing implications when the FDIC was appointed receiver in February. The notes were placed on CreditWatch with negative implications on June 7 and subsequently downgraded on June 28. This was only the second time in credit card ABS history that a triple-'A' credit card bank bond was downgraded due to weakening performance and not due to a downgrade of a credit enhancement provider. The first downgrade occurred a few months earlier, when the senior classes of First Consumers' transactions were downgraded as losses approached 18%. Both the First Consumer and NextCard deals remain on CreditWatch with negative implications.

Although Standard & Poor's Credit Card Quality Index (CCQI) loss rates have trended upward since the end of the third quarter of 2001, losses have started to stabilize and, on average, portfolio yield, payment rates, and excess spread remain healthy. CCQI loss performance is likely to deteriorate further in the second half, especially if the economy double dips and the bankruptcy reforms finally pass. Currently, average bankcard losses are 6.6% and may go up as high as 7.2%. "However, average excess, currently north of 6%, is still able to withstand further increases in charge-off rates," said Ms. Tillen. Additionally, the payment rate on card portfolios continues to withstand economic uncertainty. Obligors continue to pay monthly at a rate in excess of 15%. Should performance then deteriorate to a point where excess is squeezed to zero, a strong payment rate will help investors get paid out sooner.