Securitization: Still Vital, Still Impaired

Securitization has remained a vital funding source to the credit card industry during the thaw brought on by the government's emergency Term Asset-Backed Securities Loan Facility. But the future of this market is in flux.

Among other things, new accounting rules that effectively eliminate off-balance-sheet treatment will go into effect next year, undermining some of the rationale for securitization by requiring more capital and loss reserves at issuers.

Also, Talf support for consumer ABS is set to expire at the end of March, though the Federal Reserve Board and the Treasury Department have said they would consider further extensions.

Talf broke a six-month freeze in issuance that began last September. Securitization funded 48.8% of revolving consumer credit in July, 64 basis points more than the year prior, according to the Fed. (Total revolving credit has begun a historic contraction, registering a year-over-year decline in February for the first time ever and continuing to fall through July.)

In a report published this month, Moody's Investors Service Inc. said it is unclear what the level of investor interest in asset-backed bonds will be after Talf ends — even when collateral credit performance recovers. Higher risk premiums will probably help to make securitization more expensive, Moody's said.

On one end of the spectrum, JPMorgan Chase & Co.'s chief executive, Jamie Dimon, has said it is unlikely that his company will securitize credit card receivables in the future because other sources of funding available to it will probably be cheaper.

"We have a lot of liquidity and funding capability," he said during a conference call in July. (The $2 trillion-asset banking company has issued more than $15 billion of credit card-backed securities this year, both inside and outside the Talf.)

American Express Co., by contrast, envisions a large ongoing role for asset-backed funding.

During a meeting with analysts and investors last month, its chief financial officer, Daniel Henry, said the company's funding mix in the future will be "largely driven by the markets and the cost of funding." A slide presentation showed that long-term retail deposits could make up anywhere from 20% to 50% of the total, up from 18% at the end of the second quarter; 20% to 40% for asset-backed bonds, compared with 31%; and 10% to 35% for unsecured debt — the costliest category — down from 47%.

Meanwhile, in Discover Financial Services' conference call on its fiscal third quarter last week, CEO David Nelms said the company's retail deposit platform for now is primarily supplanting brokered deposits, but "could displace some of asset-backed over the long period of time."

Its CFO, Roy Guthrie, said the $17.7 billion of borrowing by his company that is scheduled to mature in the fiscal year that will begin Dec. 1 "is well within the execution capacity of our deposit channels." But despite the deposit capability, he said, "we're beginning to see some positive signs in the non-Talf ABS market," including increased participation by nonleveraged investors.