How To Cancel Credit Card Debt

‘Slice and Dice’ Credit Card Deals Return

By: Stephen Foley, Financial Times

 

The summer holiday that went on the American Express card, the private indulgence charged to a Victoria’s Secret store card, the winter wardrobe that won’t be paid off until spring ... these little debts are flying round the financial system again and investors cannot get enough of them.

AP

Wall Street’s securitization machine, which slices and dices pools of loans into securities for sale, has been humming with increasing intensity since the Federal Reserve signaled it would keep interest rates at unprecedentedly low rates until mid-2015. Issuers have been happy to oblige investors who crave yields higher than the derisory rates available on Treasuries.

But while asset-backed securities (ABS) created from government-insured mortgages or from car loans have been widely available, issuance of credit card ABS took longer to crank back into life.

The reason is that U.S. banks had plenty of other options for funding their credit card lending, not least vast inflows of deposits for which they are paying close to nothing. The sound of investors begging has finally got through this year, though. After a three-year hiatus, Citigroup issued its first credit card ABS last week, a $500m tranche of securities backed by receivables into its Credit Card Issuance Trust.

 

More than $30bn was issued in the US in the first nine months of 2012, Dealogic data shows, more than in the previous 27 months combined. The third quarter this year was the best for issuance for three years.

 

When banks ended their boom-time spree and rationed credit card debt, consumers began paying off their balances and the banks’ loan pools began to shrink, making ABS issuance less of a priority. Bankers, though, have started to fret that investors might lose their credit-card ABS habit if the drought of issuance continued — another reason why activity has resumed.

“AAA-rated ABS for most issuers are cheaper relative to deposit funding and unsecured financing than they were in the past, and there is also internal pressure and regulatory pressure to keep a diverse funding book,” said Dan McGarvey, head of Asset-Backed Finance for the Americas at RBS Securities.

 

“Another reason is that, faced with continuing strong demand, issuers want to get product out there to keep investors engaged.”

 

Such is the strength of ABS demand in the US that overseas lenders are looking to tap the market. Canadian institutions have issued more than $5bn of credit card-backed securities south of the border this year. Last week, RBC issued a $1.2bn slug of ABS, upping the total by $300m from its original plan. According to S&P, cross-border transactions had accounted for 14 per cent of US issuance by September.

 

Investors’ appetite can be seen in tightening spreads. A Barclays index shows adjusted spreads at 93 basis points over Treasuries at the start of the year, down to 58 at the start of the third quarter and now at 42.

 

As well as accepting relatively lower yields, investors are willing to take the risk of longer-dated ABS. The average maturity of securities issued this year is close to seven years, according to Dealogic. In 2011, five years was typical.

 

Senior ABS bankers say that impending regulatory changes have given lenders an additional push towards longer-dated securitization.

 

The international Basel III accord will impose liquidity standards on banks for the first time, through a rule called the Liquidity Coverage Ratio, which urges institutions to hold enough easy-to-sell assets to survive a 30-day outflow of capital.

The thrust of this and of other regulation since the credit crisis has been to raise the pressure on banks to diversify their sources of funding away from depositors, who can flee in a crisis, to investors such as the buyers of long-term ABS.

 

JPMorgan Chase has been the most prolific issuer of credit card ABS this year, accounting for 25 per cent in the US, on S&P data, followed closely by Discover.

 

Other issuers include American Express, General Electric and WFN, whose white-label store cards are used by Victoria’s Secret, Pottery Barn, Ann Taylor and other chains. In all, 37 credit-card ABS deals have come to market so far this year. Four of them have had average maturities as long as 10 years, the highest number since 2008.

 

The outlook for investor demand is unlikely to dim as long as the credit quality in the underlying pools remains this high, says Michael Dean, head of consumer ABS at Fitch.

 

The rating agency reported that the amount of debt on cards more than 60 days delinquent fell to 1.76 per cent in August, the lowest level since its Fitch Prime Credit Card Index was launched 21 years ago. Delinquencies are down 26 per cent, year-over-year, and are also well below the long-term average of 3.02 per cent.

 

“Card issuers were proactive early on in the crisis in cleansing their portfolios of riskier borrowers,” said Mr Dean. “Credit card ABS performed exceptionally well during the credit crisis. Issuers took steps to safeguard their trusts, although the strength of the ABS structures would have yielded only marginal downgrades even if they hadn’t done so.

 

“Securitization was deemed taboo during the crisis, but once it became clear that sectors like consumer ABS proved resilient, investor demand resurged.”