[This page is a series of focused write-ups on applications in securitisation. For other applications, see the Securitisation Applications section on the Securitisation home page.]
Important links on credit card securitisation
The cult of the credit card has become well -accepted world over. The dramatic increase in the acceptability of credit cards is revealed in the following data about outstanding credit card receivables in the USA: from $234 billion of total receivables outstanding in 1990 to $356 billion outstanding as at May, 31, 1998.
Credit card securitisation market:
For banks specialising in issuance of credit cards, securitisation has been a primary vehicle for financing. A report by Fitch IBCA indicates that as of May 31, 1998, more than $216 billion in credit card securities had been issued in USA.
A vast majority of card securitizations have been completed using two different vehicles — the stand-alone trust and the master trust. The stand-alone structure is a single pool of receivables sold to a trust and used as collateral for a single security. When the issuer intends to issue another security, it must designate a new pool of card accounts and sell the receivables in those accounts to a separate trust. This structure was used from the first credit card securitization in 1987 until 1991, when the master trust became the preferred vehicle.
The master trust structure allows the issuer to create various securities from the same pool of receivables. The master trust serves as a reservoir of receivables to which receivables are added from time to time to issue more securities. The structure allows the issuer increased flexibility.
The outstanding feature of credit card securitisation is the short cycle of the receivable – it is paid off within 4-5 months. Therefore, the usual amortization structures used in auto loans etc does not work handy in credit cards. If the collections from the debtors were to be passed directly to the investors, the investors would get paid off within 4-6 months which is neither desirable nor cost-convenient. Therefore, a unique structure is worked out to give to the security a longer life span than the average repayment period of a credit card receivable. The method involves splitting of the receivables into finance charges and principal. While the finance charges are utilised for paying the coupon on the security, the principal repayment is treated in either of the three ways discussed below:
1. Revolving method: Under this method, the principal repayment each month is released to the issuer for buying fresh receivables.
2. Controlled repayment: Under this structure, the principal repayment is broken into controlled pre-fixed amortization and is used to retire the security over a fixed period, say 12 months. The excess of principal collection in any month is reinvested in buying new receivables with which the deficit, in any month, is covered.
Another significant feature of credit card receivables is the lack of asset backing. As unsecured revolving debt obligations, credit card receivables offer no collateral in the event of cardholder de-fault. As a result, recoveries are limited.
To achieve investment-grade ratings, credit enhancement is needed to insulate investors from fluctuating payment patterns and cardholder charge-offs. Common forms of credit enhancement are excess spread, a cash collateral account (CCA), a collateral invested amount (CIA), and subordination.
- According to Fitch IBCA, the following are the important performance parameters for adjudging the quality of a credit card portfolio:
- Underwriting standards
- Cardholder credit scores
- Card type — retail, low-price, affinity, and co-branded, among others
- Fixed- or floating-card annual percentage rate
- Flexibility of issuer to reprice card rates
- Frequency of floating-rate resets
- Use of teaser rates
- Geographic and demographic diversification
- Convenience usage
- Competitive position
- Discounting of new receivables into trust
- Other structural features
General list of links on credit cards: http://www.creditcardindustry.com/index.html