Monday, March 29, 2010

Credit card ABS supply slows to trickle in Q1

Original posted on Reuters by Nancy Leinfuss:

Sweeping changes to the securitization landscape this year prompted a retreat by credit card issuers from the U.S. asset-backed market in the first quarter.

After leading supply over recent years, credit card securities accounted for a paltry $1 billion of the $28 billion in asset-backed securitizations sold through the first quarter.

A tougher regulatory and legislative environment combined with new accounting rules and tighter lending standards have all worked to clamp down on credit card ABS supply this year.

Accounting changes requiring lenders to move securitizations, once held in separate bankruptcy remote trusts, back on to their balance sheets has reduced the appeal of securitization as a funding tool for some issuers.

"Securitization will lose its capital advantage in many cases now that ABS programs have to be consolidated on bank balance sheets," said John McElravey, analyst at Wells Fargo Securities.

With credit card securitizations now weighing on bank balance sheets, other worries are also emerging concerning the treatment of the securities by the Federal Deposit Insurance Corp in the event of a bank failure.

"A lot of potential issuers are waiting on a final ruling on the safe harbor for securitizations. Issuers need a more definitive answer that these assets can't be taken in a bankruptcy," said William Bemis, portfolio manager at Aviva Investors.

The safe harbor was originally created so that investors could rely on securitized assets for payment without concern that the assets would be interfered with by the FDIC in the event of a bank failure.

In addition, Senate Banking Committee Chairman Christopher Dodd's revised U.S. financial regulation reform bill is seen as the next step in a long push by the Obama administration and congressional Democrats to tighten bank and capital market oversight after the financial crisis.

"Senator Dodd's proposal, combined with regulatory reform legislation in the House and the FDIC's safe harbor rule, will likely have a significant effect on the consumer ABS market," said Ajay Rajadhyaksha, analyst at Barclays Capital.

The FDIC recently extended its safe harbor provision through Sept. 2010, grandfathering all new securities issued under its old plan, until a final decision on the treatment of the securities is hammered out.

In the meantime, credit card issuers are turning toward other funding alternatives, like the unsecured corporate debt market to finance consumer debt, while others are simply relying on their own deposit base to fund new loans.

"The significant inflow of deposits to commercial banks after the financial crisis and the increase in deposit insurance may make balance sheet funding a better option for credit card ABS issuers," said McElravey.

Issuance of credit card securities totaled $46 billion in 2009, with some help from the Federal Reserve's emergency loan facility. Some $100 billion of credit card securities are expected to mature this year in the ABS market. However, market participants expect a large part of that to be funded away from the ABS market.

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