Two recent announcements by Moody's Investors Service illustrate how rising chargeoffs are becoming an increasing drag on asset-backed securities.
Moody's said Thursday that it was reviewing for possible downgrading $3.68 billion worth of securities backed by credit card receivables issued by Chevy Chase Savings Bank in Maryland.
Moody's cited the 12% chargeoff rate in Chevy Chase's pools of securitized credit cards, almost double the industry average, as the reason for its review.
The announcement came a day after the ratings firm said it is reviewing for possible downgrading the "B" piece of securities backed by a subprime auto lender called AutoFlow, which is a joint venture of Omni Financial Services of America Inc. and a unit of Credit Suisse First Boston Corp.
"B" pieces are the portions of asset-backed securities used to support the senior, or "A," portion of the security should credit deteriorate, as well as attract yield-hungry investors.
Although securities from other subprime auto lenders have had similar problems-last month Moody's actually downgraded the "B" piece of securities issued by Aegis Auto Finance Inc.-this is the first time a subprime auto lender's financial problems directly involve a top Wall Street investment bank.
Wall Street firms, such as Merrill Lynch & Co. and Prudential Securities, frequently underwrite the asset-backed securities of subprime auto lenders.
But it is almost unheard of for them to act as buyers of the installment contracts and then securitize them, as Credit Suisse First Boston Mortgage Capital did with Omni Financial, a subsidiary of World Omni Financial Corp., a financial services company based in Deerfield Beach, Fla.
The two parties' unusual arrangement came about "because First Boston's charter precludes them from doing consumer finance and World Omni's prevents them from doing subprime auto," said Moody's analyst Min Ye.
Credit Suisse First Boston and World Omni officials did not return phone calls.
According to Mr. Ye, investors in the "B" piece, which is rated Ba2 and currently valued at $23.3 million, have not received interest payments due during the last three scheduled dates. The securities offer a coupon of 9.16%.
Mr. Ye said the deal was structured in such a way that failure to make the payments does not technically constitute default. Nevertheless, "the fact they've missed three payments is why we're reviewing them," he said.
The senior, or "A" piece of the securities, worth $137.9 million, is unaffected. It is rated triple-A because it is insured against default by Financial Security Assurance Inc.
Mr. Ye said losses in the "B" piece were higher than anticipated. Cumulative chargeoffs since the deal was closed last September have reached 8.18%, and delinquencies were 13.34%.
Banks stocks were mostly lower in moderate trading Thursday. The Standard & Poor's bank index was off 0.6% near the close while the S&P 500 index was off about 0.4%.
