Rising chargeoffs may force banks to pay investors in their credit card securities early, analysts say.
Early payment has been a rare occurrence in the history of credit card securitizations, and a steep rise could damage investor confidence in the growing market for the securities.
Securities backed by credit cards have become an important source of funding for banks. In recent years investors have bought $165 billion worth of securities backed by banks' credit card receivables, according to Moody's Investors Service - making it the largest sector in the asset- backed securities market.
Bank credit card offerings are especially popular because they usually have triple-A ratings and yield more than Treasuries or top-rated corporate bonds. The securities provide for early payment should underlying assets deteriorate too much.
Lately chargeoffs have begun causing headaches for banks that securitize. Last month chargeoffs at Banc One Corp.'s pool rose to 9.34%, causing Moody's to put the pool on review for a possible downgrade.
In cases like this, banks can replenish their pools with more reliable receivables, or pay early-an unpopular option with investors.
Up to now, banks have usually shored up their securitized credit card portfolios when the chargeoff virus spread. The only time a bank was known to do otherwise was in 1991, when Southeast Bank's deal ended prematurely in part because the early payment triggers were "a little bit too stringent," said Jeff Salmon, head of asset-backed research at UBS Securities.
But now some midsize credit card issuers could decide the process of shoring up their securitization pools isn't worth it, said Mr. Salmon. And this could be their first step towards selling all or part of their credit card portfolios.
"If chargeoffs keep rising, some banks may decide these complex deals are a pain to do," Mr. Salmon said. "They could pay off investors early, put the assets back on their books, and sell them to a larger credit card company."
Chargeoffs are likely to continue rising through 1997, says Mark M. Zandi, chief economist at Regional Financial Associates, West Chester, Pa.
"In the next six to nine months we'll see them move up even further, by maybe another 50 basis points," Mr. Zandi said. He attributed that to the record number of credit card delinquencies currently on banks' books.
He added that rising chargeoffs don't necessarily suggest bank irresponsibility with credit. Indeed, it might signal just the opposite. Many banks say they are tightening credit standards, and chargeoff levels may rise because fewer new loans are replacing the old, delinquent ones, Mr. Zandi said.
According to Moody's, average chargeoff rates in securitized credit card pools reached 6.1% in December, up from 4.5% in December 1995.
Chargeoffs are significantly higher in the securitization portfolios of small and midsize banks. Chargeoffs at Chevy Chase Savings Bank in Maryland, are running at 12.4% of total credit card loans; First Consumers National Bank in Beaverton, Ore., has a rate of 11.96%; and Prudential Bank & Trust in Atlanta is charging off 10.26%.
But bigger banks haven't been immune from the chargeoff virus. Chargeoffs in Mercantile Bancorp.'s securitized pool reached 9.2%, and First Union Corp.'s were 7.4%.
When the securitized portfolio at Mercantile showed rapid deterioration a year ago, the St. Louis-based bank took steps to shore it up. But UBS' Mr. Salmon said investors couldn't be certain the bank would do so again should it have similiar problems. Mercantile officials couldn't be reached for comment.
Jay Gould, director of investor relations at Banc One, declined to comment on what the Columbus, Ohio, bank would do about its deteriorating securitized portfolio.
Although market demand for securities backed by credit card receivables shows no signs of abating, investors at a recent conference on securitization in Scottsdale, Ariz., said they are learning to discern which are the better offerings.
"Investors are going to start tiering credit card securities by the quality of receivables and cash flows," said John R. Wilson, who oversees $1.1 billion in investments as managing director at Prudential Structured Finance Group.
