Even before the delinquency problems in Chevy Chase Savings Bank securities surfaced last week, bankers were preparing for a crack in the $107 billion market for asset-backed securities.
As a result, issuers and underwriters of such securities profess to be unfazed by news that two issues by Chevy Chase, backed by credit card receivables and totaling $450 million, might be prepaid.
"I don't think [the Chevy Chase situation] should affect anyone's willingness to come to market. It won't affect ours," said Hendrik Bouhuys, a vice president at Manufacturers Hanover.
Chevy Chase, a Maryland savings bank, accounced last Wednesday that it may retire the two deals. Though industry observers are convinced that sufficient collateral and credit enhancements will ensure that investors are repaid in full, they express concern that comparable rates of return are no longer available.
During the past three months, the two deals were experiencing loss rates in excess of 6% -- the threshold for a vote on premature amortization. If holders of 25% of the securities vote in favor of amortization, the issuer must return the principal prior to the scheduled maturity dates.
These concerns have been in the market for months, bankers say, and Chevy Chase's situation is simply the most visible evidence that these fears need to be addressed.
The stakes are high. Banks depend heavily on asset securitization to manage their capital. They had securitized $50.3 billion of assets as of the end of 1990, 47% of the total market -- and they do not want investors to sour on the asset-backed market.
Take Citicorp. It is the number one issuer of securities backed by credit card receivables, and the bank relies on asset securitization as one of its least costly methods of boosting its capital ratios.
Citicorp's deals generally sell easily, and the bank has securitized close to $16 billion in credit card receivables. But several months ago, defaults started to rise in the pools of receivables used to back several of its early asset-backed deals.
The bank approached holders of the securities and asked them to accept a change in the terms of the deals. The change would allow losses to reach a higher level before triggering prepayment.
In one Citicorp deal, for example, the credit card receivables were base rate -- the minimum rate the portfolio must generate over time in order to continue to amortize according to the original plan -- was 14.65%. That left a cushion of just 54 basis points.
But Citicorp recently obtained permission from investors to drop the base rate to 12.35%. Had that change been in effect in May, the cushion would have been nearly three percentage points, a healthy spread.
The chance means loss rates on collateral are now allowed to reach higher levels before any alarms go off. But the new loss rate may require early prepayment before true credit quality is affected. If the cushion averages zero or less for three successive months, the securities simply start to amortize early. Investors receive their money back earlier, a prospect about which they may not be enthusiastic, but they do still get their money back.
Banks are also changing the way they structure the collateral that supports credit card receivables. Both Citicorp and Chase Manhattan Corp. have used large master trusts, huge pools of receivables, to back several deals. The large pools receive regular injections of new receivables as old ones pay off, and new receivables are typically better-quality credits.
Besides Citicorp and Chase, Manufacturers Hanover Corp. has filed a registration to issue securities backed by credit card receivables using a master trust structure.
So far, the secondary market for asset-backed securities by the announcement from Chevy Chase. Trading in the Chevy Chase deals has stopped, but activity continues elsewhere in the market, and rates have not changed on the news.
"Nothing happened to spreads because a lot of the early prepayment stuff was already built into the market," one trader said.
Rating agencies are not likely to change their approach to evaluating asset backed securities. At Standard & Poor's Corp., Andrew Dym, a vice president, said he would still rate the Chevy Chase securities AAA if he were rating them today.
Friday's Market
Undaunted by troubles at Chevy Chase, Chase Manhattan Corp. offered its first public auto loan securitization through its Chase Lincoln First Bank unit.
Underwriters led by Chase Securities Inc. priced the $311.48 million of securities as 7 3/4s to yield 7.80%, 85 basis points more than the two-year Treasury note.
The securities, which have an expected final maturity of Aug. 15, 1994, are backed by indirect new and used auto and light truck receivables from Rochester, N.Y.-based Chase Lincoln.
Underwriters expect the major agencies to issue triple-A ratings based on the quality of the loans and an 11% letter of credit from Union Bank of Switzerland.
Chase's deal highlaghted a modest day in the new-issue market, where syndicate desks priced $500 million of straight debt.
In the secondary market, seasoned long-term high grades slipped 1/8 to 1/4 point in thin trading, while junk bonds largely marked time.
Among the major losers were bonds of Columbia Gas System Inc., which slumped for the third consecutive session.
Columbia's bonds were battered last week after the Delaware-based natural gas utility said it may be forced into Chapter 11 by onerous take-or-pay contracts with its suppliers.
In afternoon trading, Columbia's 8 3/4s of 1995, which fell 11 points Thursday, were quoted at 82 1/2, off nearly four points on the day.
Those in primary market included General Motors Corp., which offered three-year securities through a Salomon Brothers team. The largest U.S. automaker offered the non-callable notes as 8s at par to yield 69 basis points over the Treasury curve.
Moody's Investors Service rates the issue Al; Standard & Poor's rates it A.
