Card-Backed Issuers Bracing For Repeat Securitizations
Like sequels to summer movies, a wave of reruns could soon hit the market for asset-backed securities.
More than $6 billion in securities backed by banks' credit card receivables are expected to mature between January 1991 and December 1992. That's close to 14% of the $42.5 billion in credit card receivables that banks had securitized since the market's inception.
When these securities mature, banks that issued them will have to go through the issuing process all over again - or restore the assets to their balance sheets.
Banks will have to resecuritize billions in credit card receivables simply to keep their balance sheets and capital needs from swelling.
"You have to do the same thing again just to maintain your position." said Julie Schlueter, a group vice president at Duff & Credit Rating Co.
Citicorp will have $1.75 billion in deals backed by credit card receivables maturing by the end of 1992, according to statistics provided by Duff & Phelps. Security Pacific Corp. will see $750 million in such securities mature.
First Chicago Corp. already had $700 million in its credit-card-receivables-backed securities mature, and will see $300 million more by the end of 1992. At the low end, Colonial National Bank USA of Wilmington, Del., faces $150 million of these securities coming due.
Some Bad News
If banks keep securitizing new credit card receivables in addition to resecuritizing old receivables, the pickup in supply may force up rates on asset-backed securities - bad news for institutions hoping to securitize other assets and thereby shrink their balance sheets.
"It's got to add to the supply worries in a market that historically has not taken very well," one trader said.
Rates on asset-backed securities have always increased relative to Treasuries during the fourth quarter, he said. A number of banks typically rush to market then to remove assets from their balance sheets before yearend; and investors start demanding higher yields when confronted with a wide choice of new issues. In both 1989 and 1990, spreads on securities backed by credit card receivables rose about 20 basis points between the summer and yearend.
New Supply Not Only Factor
Higher spreads are bad news for banks contemplating the securitization of credit card receivables. They mean banks will have to pay high interest rates relative to prevailing Treasury rates on the securities they will issue. Unless Treasury rates are extremely low, that will cut into the net interest income the receivables generate for the bank.
To be sure, new supply will not be the only factor affecting rates in the market for asset backed securities.
"I think it's a mistake to focus on volume as what drives up spreads," said Scott Ulm, a vice president at First Boston Corp. Aside from supply, worries about the economy and the prospect of war in the Middle East drove spreads up late last year, he said.
A continually broadening investor base is making it easier to absorb a lot of new issues, one trader said. "I think the market can handle the supply," he said.
Moreover, banks will not necessarily have to resecuritize credit card receivables as securities mature. If they have capital to spare, they could simply take the accounts back on their balance sheets and set aside capital against them. BankAmerica Corp. did this in late 1989 when a 1987 issue of securities backed by credit cards matured.
A spokesman for Citicorp said the maturing securities "shouldn't have any impact whatsoever on our continuing program." He said the bank has planned its issues so they mature one at a time, rather than in bunches. That means even if the bank keeps once-securitized receivables on its balance sheet, it will not face a sharp increase in capital requirements at any one time.
A spokeswoman for Security Pacific said the bank has made no decision yet with respect to its maturing credit card deal. But market sources said Security Pacific might issue new securities backed by credit card receivables later this year, and they expect some of the receivables backing the old deal to collateralize the new offering.
But the prospect of new supply will certainly not make new issues any easier to sell at low rates - and that's getting tacit acknowledgement from bankers.
Already, banks are starting to issue longer term securities backed by credit card receivables, said Thomas Hourican, a senior vice president at Standard & Poor's Corp.
"Some issuers are stretching out their deals so they don't have to refinance them," he said. A few issuers are setting up special purpose corporations to hold the assets and fund them with commercial paper, he said.