Citicorp on Wednesday completed one of the lowest-cost borrowings ever in the credit card securities market.
The $1.6 billion deal, Citicorp's first this year, was priced at one of the lowest yields and tightest yield spreads over U.S. Treasuries since the credit card securities market came into being in the mid-1980s. The bulk of the offering was priced to yield 5.951%, or 46.6 basis points over three-year Treasuries.
According to Dean Witter Reynolds Inc., a December 1991 deal involving card loans serviced by Household Finance Corp. paid an equal yield but a higher spread than the Citicorp deal. In 1989, Sears, Roebuck and Co. paid a higher yield but narrower spread than Citicorp on a card deal.
Supply Low, Demand High
Issuers of credit card securities have benefited from substantially lower borrowing costs this year, reflecting reduced supply and high investor interest.
For example, Citicorp sold $650 million of credit card securities last November at ayield of 6.37%, 68 basis points over Treasuries.
Wednesday's issue, known as Standard Credit Card Master Trust I 1992-2, was split into a $1.5 billion three-year senior tranche and a $96 million three-year subordinated tranche. The subordinated portion was priced to yield 6.19%, 70 basis points over Treasuries.
The senior tranche was rated triple-A by Moody's Investor Service Inc. and Standard & Poor's corp., while the subordinated tranche was rated A2 by Moody's and A by Standard & Poor's.
Citicorp Securities was lead manager and UBS Securities co-lead manager.
Besides benefiting from lower interest rates, Citicorp reduced its costs by increasing the size of the senior portion of the offering from previous issues. Senior portions of credit card issues pay lower interest rates than the subordinated portions.
Citicorp expanded the senior tranche to 94% of the total issue from the 89% level of past deals. The company said it saved about $200,000 in annual interest costs by increasing the size of the senior tranche.
To do this, it allocated more credit support to the senior portion. The backing was in the form of a cash collateral account equal to 5% of the principal to support the senior portion. The provider of the account was not identified.
In last year's deals, only the subordinated tranches carried cash collateral credit support, a Citicorp official said.
Wednesday's sale reduced the overall interest cost of Citicorp's outstanding credit card issues. Credit card securities issued through Citicorp's master trust, its principal vehicle for offering these securities, fell 44 basis points to a weighted average coupon of 7.64% after the new issue.
The reduction roughly corresponds to the fall in yield of the underlying credit card loans, a Citicorp official said. A switch from fixed interest rates to variable rates on card loans has caused Citibank's card revenues to drop recently.
Citibank plans a total of $5 billion to $7 billion in card-backed securities this year, including up to $2 billion in credit-card-backed commercial paper to be issued through the bank's new McKenna Triangle special-purpose vehicle, according to bank officials.