The credit card asset-backed securities sector is awaiting the final guidelines bank regulators will issue Friday on credit card lending. The regulatory changes, to be published by the Federal Financial Institutions Examinations Council, could bring five basis points worth of further spread widening to triple-A, fixed-rate sub-prime names, predicts Alessandro Pagani, ABS analyst at Banc One Capital Markets.
He says the widening--although modest since most of the news has already been priced in--would result from the fact that compliance with the new accounting guidelines may bring modest new loss statistics initially across the industry.
As an illustration of those statistical losses, a Deutsche Bank analyst says the market will look at how the regulators will focus on accounting treatment of recoveries. Some credit card lenders only include principal in charge-off amounts, but when accounting for recoveries, they include, not only principal, but also finance charges and fees. This approach understates yield and net losses while it overstates recoveries, says this analyst.
The sector has seen a lot of negative headlines in July causing spread to widen by 30 basis points on some of the Capital One triple-A tranches, say traders. Michelle Russell-Dowe, portfolio manager at Hyperion Capital, notes that part of the story is the regulators concern over Capital One or widening related to the equity sell-off on ABS bonds issued by J.P. Morgan Chase and Citigroup. But the real issue, she emphasizes, is investors becoming more cautious over higher coupon, lower excess spread and higher premium bonds. As a result, demand is shifting towards floaters versus fixed-rate bonds, she says.