In a bid to expand the investor base for credit card-backed securities, MBNA Corp. and Citibank are reportedly preparing separate offerings denominated in German marks for sale this month .
The proposed offerings by two of the biggest issuers in the asset-backed securities market could give other issuers a new investor source to help absorb new issues following a record level of offerings during the first quarter.
The total volume of $26.2 billion during the quarter was more than 25% ahead of the volume reported in the same quarter a year ago, according to Asset Sales Report. And despite a lull in offerings following the quarter- end flurry, issuance is expected to pick up again in mid-April on the way to what analysts expect will be a record $130 billion for the year.
But the rising volume could cause higher borrowing costs for issuers if investor demand does not keep up with supply.
The large first quarter volume pushed spreads over treasury yields on fixed rate maturities only slightly wider, according to Dan Castro, the chief asset-backed securities analyst at Merrill Lynch & Co. But spreads on medium or longer-term securities could widen should supply rise quickly, he warns.
Neither MBNA or Citibank would comment on the offerings. But Vernon Wright, vice chairman of MBNA America Bank, said deals denominated in foreign currencies make sense for issuers and investors alike.
"There are a lot of fund managers and institutional investors in the European market who currently invest in dollar-denominated asset-backed securities," he said. "They would also like to have some local currency securities so they don't have to do a currency swap to protect them from exchange rate risk."
The two issuers will have few deals to guide their way. While MBNA completed a credit card offering denominated in British pounds sterling last August, the loans themselves were made in Britain. Still, Mr. Wright said, the deal was very well received.
Only New York's Citibank has ventured into foreign markets with securities backed by U.S. credit card loans. With $20 billion worth of asset-backed securities currently in the market, the bank ventured to Japan last spring to sell about $350 million in yen-denominated securities.
But if not structured properly, such deals can carry currency risks to investors and issuers alike. To eliminate the currency risk involved in its deal, Citibank reportedly included a currency swap in the structure. Each time a payment was made from the trust holding the dollar-denominated credit card loans, the cash flows are swapped into Japanese yen.
As a way of priming the European market, Citibank completed its first Eurodeal in more than a year in February. The $500 million credit card- backed deal was denominated in U.S. dollars and marketed specifically to institutional investors interested in fixed rate securities.
Despite their popularity among U.S. issuers, asset-backed securities are rare in Germany. Volkswagen completed the first-ever public offering of these securities in February when it sold $334.9 million of automobile leases.
