A spike in chargeoffs in a $400 million credit-card-backed security issue by Mercantile Bank has become a point of contention between the two leading debt rating agencies.
Moody's Investors Service placed the securities under review for a possible downgrade after chargeoffs in the Mercantile Credit Card Master Trust 1995-1 series doubled to more than 9% from March through October. It was the first major negative action by either agency on a credit-card- backed issue.
Standard & Poor's Corp., however, quickly affirmed its ratings on the $400 million of securities.
The $324 million senior class is currently rated AAA by both rating agencies. The $40 million subordinated certificates are rated A1 by Moody's and A by Standard & Poor's. And the $36 million collateral interest amount, the most subordinated slice of the securities, was rated Baa3 by Moody's and unrated by S&P.
Although consumer credit quality is a hot topic in banking circles these days, the agencies agreed that the losses reported by the affiliate of Mercantile Bancorp. of St. Louis probably do not point to higher consumer loan losses elsewhere.
Mark Douglass, a senior structure finance analyst with Moody's, said the review was initiated because changes in the way the master trust's portfolio was managed could mean that the securities were more risky.
Mr. Douglass said Moody's was concentrating on personnel changes in Mercantile's collection management and processing following the sale of the securities. He added that management's increased focus on its growing unsecuritized portfolio of cards cobranded with Southwestern Bell raised the possibility that it was not giving enough attention to the securitized portfolio.
"The new cobranded card is the growth vehicle for the future, and they are managing it that way," Mr. Douglass said.
In affirming its rating, Standard & Poor's said the structure of the bank's underlying trust was the cause for the spike in chargeoffs.
The loss ratio started to grow, the agency said in a report issued Nov. 30, because no new loans have been added to the trust this year.
S&P pointed out that Mercantile was taking steps to overcome loss problems by boosting its collection staff by 50% by yearend.
But Mr. Douglass said Moody's view considers the effect the rise in chargeoffs will have over the life of the securities.
"This puts us on a new expected path," he said. And if chargeoffs are this high in good economic times, it is likely they will rise if the economy falters next year.
Nonetheless, most analysts agree the problems do not indicate an overall trend in consumer credit quality.
In a Nov. 1 research report, Dan Castro, director of asset-backed research at Merrill Lynch, pointed out that less than 2% of all consumer loans are currently more than 30 days late. While slightly above the 1.7% rate reached earlier this year, the current rate is still one of the lowest delinquency rates reported in more than 20 years.
Mr. Douglass agreed that Mercantile's problems are unique.
"We have seen the industry in general start to show some pick-up in chargeoffs," he said. But, "This is more an isolated event regarding Mercantile."