The amount of outstanding credit card-backed bonds has been falling since 2008 as maturing securities have exceeded new issuance, a trend that Wall Street has forecast will accelerate sharply this year.
But despite all the capital markets turmoil, and the seismic shift underway in the accounting and regulatory environment for securitization, the credit card industry continues to rely on such funding in roughly the same proportion as it has in previous years. (See graphic below.)
This is because credit card lending has been contracting in tandem as issuers tighten underwriting and charge off bad loans and consumers trim debt.
In 2008 and 2009, total receivables declined 7.8%, to $894 billion, according to data from the Federal Reserve, and securitized receivables declined 3.5%, to $434 billion. Thus, the percentage of receivables funded through securitization grew by 2.2 percentage points, to 48.6%.
Issuance of credit card-backed bonds declined 25.8%, to $43 billion, in 2009, according to data from Barclays Capital Inc., and the company has projected a further decline of 6.3% to 18% this year, to $35 billion to $40 billion.
(By comparison, annual issuance ranged from $52 billion to $68 billion from 2001 to 2006, and reached a peak for the decade of $91 billion in 2007. No credit card-backed bonds were sold for about half a year before the government started its Term Asset-Backed Securities Loan Facility rescue effort in March 2009. Issuance locked up again late last year amid uncertainty over how bondholders would be treated in bank seizures because of accounting changes requiring issuers to show securitizations on their balance sheets.)
Meanwhile, Barclays estimated that $92 billion of credit card-backed bonds are scheduled to mature this year, or 41.8% more than in 2009. (Last year, maturations fell 3.1%, to $65 billion.)
Forecasts for less issuance are based in part on the diminished appeal of securitization because of factors like the loss of the advantages of off-balance-sheet accounting and the prospect of much stricter regulation. Lenders like American Express Co. and Discover Financial Services have aggressively built deposit-taking capabilities, and JPMorgan Chase & Co. has said it probably will not securitize credit card receivables in the future because other cheap funding alternatives are available to it.
But the forecasts are also based on the expectation of reduced funding requirements because of restrained lending activity. Receivables fell 9.5% last year. If they fall another 9.5% this year — which is roughly in line with what some analysts have predicted — and the amount of credit card-backed bonds declines by about $55 billion, as Barclays predicted, securitization would still account for about 46.9% of funding in the card business.
That would be a 1.7-percentage-point drop from the current level but still within the range of 46.1% to 49.4% that prevailed from 2005 to 2007.
And the diminishing supply of credit card-backed bonds could itself put the brakes on how far the trend goes. Analysts have projected that investor dollars chasing fewer bonds would continue to pressure spreads this year, making the funding channel more attractive.
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