Chevy Chase Savings Bank saved its credit card securities from a downgrading by buying insurance to shore up their deteriorating credit quality.
In May Moody's Investors Service put $170 million worth of the bank's securities backed by credit card receivables on review for possible downgrading. The ratings agency cited rising chargeoffs-reaching as high as 12%-as the reason for its review.
Chevy Chase, a privately held bank in Maryland, avoided the embarrassment of being the first bank to have its credit card securities downgraded due to rising chargeoffs by buying a surety bond from bond insurer Capital Markets Acceptance Corp. The insurance protects investors from the early termination of the securities.
These safety nets, or "wraps," are common for many newer types of asset- backed securities. They give investors confidence because insured securities take on the credit rating of the insurer, which is invariably AAA, and save investors the angst of dealing with a less creditworthy issuer or security.
But these wraps are quite rare among credit cards because investors are familiar with credit card securities and issuers don't want to pay an insurer a portion of the yield, reducing profits.