Market Unfazed By Problems At Chevy Chase
Even before the delinquency problems in Chevy Chase Savings Bank securities surfaced this week, bankers were preparing for a crack in the $107 billion market for asset-backed securities.
As a result, issuers and underwriters of such securities profess to be unfazed by news that two issues by Chevy Chase, backed by credit card receivables and totaling $450 million, might be prepaid.
"I don't think [the Chevy Chase situation] should affect anyone's willingness to come to market. It won't affect ours," said Hendrik Bouhuys, a vice president at Manufacturers Hanover.
Chevy Chase, a Maryland savings bank, announced Wednesday that it may retire the two deals. Though observers are convinced that sufficient collateral and credit enhancements will ensure that investors are repaid in full, they express concern that comparable rates of return are no longer available.
Holders Have Option
During the past three months, the two deals were experiencing loss rates in excess of 6% - the threshold for a vote on premature amortization. If holders of 25% of the securities vote in favor of amortization, the issuer must return the principal prior to the scheduled maturity dates.
These concerns have been in the market for months, bankers say, and Chevy Chase's situation is simply the most visible evidence that these fears need to be addressed.
The stakes are high. Banks depend heavily on asset securitization to manage their capital. They had securitized $50.3 billion of assets as of the end of 1990, 47% of the total market - and they do not want investors to sour on the asset-backed market.
Citicorp Also Shows Stress
Take Citicorp. It is the No. 1 issuer of securities backed by credit card receivables, and the bank relies on asset securitization as one of its least costly methods of boosting its capital ratios.
Citicorp's deals generally sell easily, and the bank has securitized close to $16 billion in credit card receivables. But several months ago, defaults started to rise in the pools of receivables used to back several of its early asset-backed deals.
The bank approached holders of the securities and asked them to accept a change in the terms of the deals. The change would allow losses to reach a higher level before triggering prepayment.
In one Citicorp deal, for example, the credit card receivables were yielding 15.19%, net of losses. The base rate - the minimum rate the portfolio must generate over time in order to continue to amortize according to the original plan - was 14.65%. That left a cushion of just 54 basis points.
But Citicorp recently obtained permission from investors to drop the base rate to 12.35%. Had that change been in effect in May, the cushion would have been nearly three percentage points, a healthy spread.
The change means loss rates on collateral are now allowed to reach higher levels before any alarms go off. But the new loss rate may require early prepayment before true credit quality is affected. If the cushion averages zero or less for three successive months, the securities simply start to amortize early. Investors receive their money back earlier, a prospect about which they may be unenthusiastic, but they do still get their money back.
Banks are also changing the way they structure the collateral that supports credit card receivables. Both Citicorp and Chase Manhattan Corp. have used large master trusts, huge pools of receivables, to back several deals. The large pools receive regular injections of new receivables as old ones pay off, and new receivables are typically better-quality credits.
Besides Citicorp and Chase, Manufacturers Hanover Corp. has filed a registration to issue securities backed by credit card receivables using a master trust structure.
Manufacturers will probably issue credit card receivables sometime during the third quarter, according to Mr. Bouhuys.
Besides Manufacturers, Security Pacific Corp. is rumored to be readying a deal, and other banks are said to be preparing issues of securities backed by other types of consumer loans.
And so far, the secondary market for asset-backed securities has been largely unaffected by the announcement from Chevy Chase. Trading in the Chevy Chase deals has stopped, but activity continues elsewhere in the market, and rates have not changed on the news.
"Nothing happened to spreads because a lot of the early prepayment stuff was already built into the market," one trader said.
Agencies Holding Ground
Rating agencies are not likely to change their approach to evaluating asset backed securities. At Standard & Poor's Corp., Andrew Dym, a vice president, said he would still rate the Chevy Chase securities AAA if he were rating them today.
Standard & Poor's considers four factors in evaluating the collateral backing credit card deals, he said: the rate of payments on the credit card receivables in the portfolio, the rate at which new credit card receivables in the collateral pool are created, the default rate, and the nominal yield on the receivables.
For the Chevy Chase deal, some or allof those rates would have to deteriorate simultaneously and dramatically before the rating on the deal was affected. And while the default rate on the Chevy Chase credit cards has risen, the yield and the payment and purchase rates remain adequate, Mr. Dym said.
"We don't think from a credit standpoint that investors have to be concerned about getting their money back," he said. "They may get it back sooner than they think, but they're going to get it back."
Most at Stake The largest bank issuers of securities backed by credit card receivables Total Number Issuance(*) of issues (in billions)Citicorp 21 $16.0First Chicago 19 8.8
MNC Financial 8 4.1
Security Pacific 2 1.3
Chemical 3 1.2
Banking Corp. (*)As of Dec. 31, 1990
Source: Dean Witter Reynolds