In an action that was criticized by some credit card experts as overly harsh, Standard & Poor's Ratings Group has revised its long-term outlook on MBNA Corp. to "negative" from "stable."
The rapid growth in the Newark, Del.-based company's receivables without a corresponding increase in capital to offset any decline in face value precipitated the new outlook, S&P said.
An outlook change is less severe than placing a company's debt on credit watch, but could lead to a downgrade if S&P's concerns are not allayed in two to three years.
In its outlook change, S&P cited MBNA's decline in capital and reserves as a percentage of managed assets to 3.98% at June 30 from 5.44% a year earlier.
"We feel that because they continue to manage those assets, they continue to bear business risk from those assets," said Alison B. Emmerich, an associate director at S&P.
Analysts said, however, that S&P is taking an unduly restrictive approach to securitization.
"The whole issue here is that S&P feels that there is always a risk that securitized deals that are off-balance-sheet receivables can come back on the balance sheet," said David Hendler, a bank bond analyst at Smith Barney. "They are saying you have to allocate capital for that potential event."
Moshe Orenbuch, a stock analyst at Sanford C. Bernstein & Co., said that S&P has created a standard for capital held against a securities portfolio that is not commensurate with the underlying risk in MBNA's receivables.
"The problem with S&P's logic is that it requires a high capital allocation for a securitized pool of assets on the theory that something could come back on the balance sheet, but that hasn't happened with MBNA," said Mr. Orenbuch.
"This takes into no account the historical experience, and it takes a worst-case scenario and makes it the most likely outcome on capital allocation," said Mr. Orenbuch.
Ms. Emmerich said that MBNA has indeed managed well through the credit cycles and has been rewarded in its ratings, which are S&P's highest for any credit card company.
Nonetheless, she said S&P is concerned about the company's financial flexibility if securitized assets were to return to the balance sheet. While that hasn't happened yet, it could be somewhat problematic with the current low leverage ratios, she said.
While the specific discussion regarding MBNA involves leverage and securitization, the negative outlook at S&P also reflects a more general concern about companies that do not have product diversification.
Debt and equity analysts said that S&P's ratings for MBNA are unduly severe, already below those at other rating agencies.
S&P has a BBB-plus rating on the senior debt at MBNA Corp., while Moody's gives the same debt an A3 rating, and Thompson BankWatch assigns it an A-plus.
"We feel there is more risk in a mono-line industry than in a diversified company," said Ms. Emmerich. "One event can affect the entire operation."
Analysts agree that the products at a credit card specialist, by definition, lack diversification. They said, however, that big players like MBNA enjoy geographic diversification.
"They have diversification geographically, with a nationwide franchise, and are expanding internationally," said Nancy Pellegrino, a vice president at Thompson BankWatch. Ms. Pellegrino said that MBNA's focus is its strength. She would be concerned if MBNA started to diversify into other businesses.
MBNA can respond to a prospective downgrade by issuing equity in order to boost its Tier 1 capital ratio, noted Mr. Hendler.
"The question is whether MBNA will do anything different," said Mr. Orenbuch. "They certainly won't slow their growth. That would be ludicrous."
