Bank of America Corp., saddled with the worst credit card default rate among its biggest rivals, is shunning the asset-backed securities market it tapped for $13.7 billion last year.
JPMorgan Chase & Co., Citigroup Inc. and American Express Co. are among the issuers that sold $21 billion of card-backed debt this year through the Term Asset-Backed Securities Loan Facility, a Federal Reserve lending program to spur bond sales. B of A, the only major card issuer that did not sell any, lacks enough quality loans in its credit card trust to sell Talf bonds without being labeled a subprime issuer.
"I don't doubt that Bank of America would like to re-engage that market," said Michael Nix, who helps manage $600 million, including shares of the lender, at Greenwood Capital Associates in Greenwood, S.C. "The credit card securitization market is starting to thaw, but there still isn't a lot of demand, so the cost of issuance may be higher than the bank thinks is worthwhile."
Christopher Feeney, a spokesman for B of A, declined to comment.
B of A's 13.82% credit card default rate in July, the highest among the biggest lenders, helps explain why loans in its credit card trust are shy of the threshold that would allow it to sell debt through Talf and be labeled a prime issuer.
Just 68% of the loans have FICO scores above 660, Barclays Capital said in an Aug. 17 research note. Anything below 70% brands the issuer subprime, and investors who buy such debt can demand extra protection against the possibility of default.
"It's an artificial constraint on B of A," said Joseph Mason, a Louisiana State University finance professor and a senior fellow at the Wharton School. "We're beginning to see the perverse incentives of a lot of these emergency government policies that were set up on an ad hoc basis. They're starting to skew funding availability."
As cheap financing dwindles, credit card profits may be squeezed, said Vishwanath Tirupattur, a Morgan Stanley analyst.
In July the U.S. average default rate fell to 10.52%, the first monthly decline since September, according to Moody's. The only major card lender with a higher rate than B of A is Advanta Corp., which is unwinding its credit card trust after defaults surged to more than 20%.