General Electric Co. has removed 2 million underperforming private-label retail credit card accounts from its securitized master trust to shore up the performance of its bonds.
The $1.5 billion of receivables were placed back on GE's balance sheet last week. According to Fitch Inc., GE sifted out the most troubled accounts from four of the largest private-label card programs it runs for retailers — J.C. Penney Co. Inc., Lowe's Cos. Inc., Wal-Mart Stores Inc. and its Sam's Club division. The accounts were delinquent, nearing chargeoff status or showing lower-than-average payment rates.
"Like a lot of other credit card trusts, GE['s] is seeing its chargeoffs and delinquencies rise," said Cynthia Ullrich, a senior director for consumer asset-backed securities at Fitch, "and removing lower-quality accounts will reduce investors' potential exposure."
A GE spokeswoman said that it is still originating sales and servicing the removed accounts.
"Removing some of the higher-risk assets from the trust should help make our securitization trust more reflective of" the private-label business' strategy, she said.
Analysts said GE's move underscores the deteriorating conditions in retail credit card portfolios, especially for nonbank issuers.
The trust's chargeoff rate stood at 10.58% on Jan. 31, its second-highest level since 2005, when changes in the U.S. Bankruptcy Code caused filings to spike.
Timothy Kolk, a managing partner of the Peterborough, N.H., card portfolio consulting firm Brookwood Capital, said GE's lack of retail deposit-gathering capability toughens the task of funding card receivables in the present downturn.
"It's very important for GE to maintain its ability to securitize its credit card receivables, so it makes sense that GE wants its master trust to continue to generate solid profits," he said.
Analysts said removing receivables from a credit card trust is rare. Last year, after it bought the banking operations of Washington Mutual Inc., JPMorgan Chase & Co. removed receivables from Wamu's master trust and replaced them with ones it had originated. The move greatly reduced the trust's chargeoff rate, according to a January research note by Barclays Capital Inc.
After GE removed its troubled accounts, Fitch affirmed the "stable rating outlook" it had previously assigned to the issuer's securities. Even before the accounts were removed, the trust reported a healthy, three-month excess spread of 8.56% for February. Ullrich said the spread — which measures bondholders' cushion against losses — would have to fall below 5% to trigger cash trapping. (Trapping is a mechanism for protecting investors in which the trust begins accumulating funds that otherwise would have flowed to the issuer.)
GE put its private-label card business on the block in late 2007 but found no takers, and it said in September it would keep the operation. Some observers said removing weak accounts from the trust could make the private-label business more attractive to potential buyers.
"Fewer drags on the portfolio like underperforming accounts could improve the portfolio's marketability somewhat," said Robert Hammer, the chief executive of the Thousand Oaks, Calif., advisory firm R.K. Hammer.
Before the shaky accounts were removed, GE's master trust had 47 million accounts with about $20 billion in receivables, Fitch said. Private-label cards generate about 88% of the trust's receivables; general-purpose cards, the rest. GE said its credit card portfolio, including nonsecuritized debts, totals about $30 billion.