Banks are starting to use the private placement market to unload bad credit card loans.
Analysts at Duff & Phelps Credit Rating Co. say they are rating one private securitization of credit card loans that have been charged off, and have been approached to grade four more.
The receivables in these securitizations are over four years past due, and investors - banking on the prospect that at least a few of the loans can be collected - can buy them for pennies on the dollar. The $50 million securitization that is up for a rating is backed up by $1.2 billion in credit card receivables.
This latest new wrinkle in securitization comes when banks are wrestling with rising consumer delinquencies. Banks are turning to the private market because it offers the flexibility needed to structure offerings for such bad debt.
"You can do much more sophisticated deals in the private market than the public," said Rebecca Devine, assistant vice president at Duff & Phelps. "Generally, you're dealing with a small group of institutional investors, and the Securities and Exchange Commission doesn't require as much information as in a public offering."
Increased bank activity is helping drive the private asset-backed- securitization market to unprecedented heights.
Duff & Phelps reported last week that volume in the private placement market has reached $6 billion through Sept. 30, nearly double 1995's total of $3.3 billion.
The 10-year-old private placement securitization market has traditionally been dominated by insurance companies seeking high returns on what are often high-risk investments.
Four-year-old credit card debts aren't the only unusual item making their way to the private placement market.
Tracy Pridgen, an analyst of asset-backed securities with Fitch Investors Service, said the agency has seen growth in securitization offerings from emerging markets, such as Latin American utility bills.
In fact, the strongest growth rate in the private placement market comes from exotic asset classes, such as movie ticket sales, restaurant franchise loans, and viatical settlements - in which terminally ill people sell their life insurance policies to a third party.
Such exotic asset securitizations - which come under the heading "other" in Duff's report - have grown to $656 million in the first nine months of 1996, up from only $25.5 million in all of 1995.
Still, much of the growth in the market comes from less exotic asset classes such as health care receivables, auto loans, and equipment leases, analysts say.
A few large banks serve as trustees or underwriters for other companies' private asset-backed securitizations. This service generates sizable fee income for banks, analysts say, and helps replace the business they've lost to alternative loan sources and to depositors putting their savings in others' mutual funds.
Last week, a public $486 million securitization offering of Navistar truck loans underwritten by Chase Securities Inc. included a $14.6 million privately placed tranche.
