For the fourth time in less than two years, rising delinquencies have forced First Union Corp. to shore up its credit card securities.
Earlier this month the bank resumed adding receivables to the trust that holds the securities-this time discounting them by 3%, so that investors will have a better cushion against loss.
The 3% discount means that $100 million worth of receivables will be held against $97 million of securities.
The move, said Lehman Brothers analyst Beth Starr in a note to investors, is designed to boost yields in First Union's credit card securities. First Union's securities' yields "have been low and their chargeoffs high compared to other issuers, so this is a move to create greater investor comfort," Ms. Starr said.
First Union follows American Express Co., Mercantile Bancorp., and Prudential Bank and Trust as companies that have sold receivables at a discount.
But no bank has had as many problems with its securitized credit card portfolio as First Union, said Standard & Poor's analyst Katie Reeves. She said the company has been more aggressive in trying to fight credit deterioration since losing favorable accounting treatment for securitizations last summer.
Retaining investors' confidence in the asset-backed market for credit cards is vital to banks. They have sold about $220 billion of publicly rated credit card securities, according to Standard & Poor's, and use the proceeds to fund their credit card operations.
Loss rates within these securities have risen dramatically in the past year. According to Moody's Investors Service, average chargeoff rates within portfolios of credit card securities reached 6.72% in March. That's higher than the previous peak of 6.2% in June 1992, after the most recent recession.
Jim Gilbraith, managing director of credit card securitizations at First Union, said the discounting will have no impact on earnings.
"A lot of investors have been getting more uncomfortable with rising delinquencies and are concerned about what impact increases in interest rates could have," Mr. Gilbraith said. "We decided it was to our advantage to do this in advance."
Discounting is just the latest step for First Union.
In the first quarter it waived the 2% fees it collected from servicing the securities for investors, and also added nearly $500 million of new receivables to replenish its securitized credit card portfolio.
In the past year First Union's loss rates have usually been worse than the industry average. They rose to 8.25% in February from 3.76% last July.
The rise has cut into the securities' excess spreads-the cushion First Union has to absorb chargeoffs and pay yields to investors.
Currently the excess spread on these securities in 3.07% and 3.15%, according to Ms. Starr, but they would be only 1.07% and 1.15% if First Union hadn't waived its 2% servicing fee.
If excess spreads average below zero for three months, the securitizations automatically terminate early, which would not be popular among investors.