credit card asset backed securities overview and...

November 2008

Credit Card Asset Backed SecuritiesOverview and Analysis

Joe MorinCorporate Debt [email protected]

2

Agenda – Canadian Credit Card ABS

• Canadian Credit Card Market Overview

• Credit Card ABS vs. Other Structured Product

• Credit Card ABS – Structural Overview

• Credit Enhancement

• Collateral Performance

• Modeling Cash Flows and Sensitivity Analysis

• Relative Value Considerations

3

Market Overview

• Credit card securitization:– Largest asset class (approx. 40%) in the Canadian term ABS market

– Public offerings of semi-annual pay bullet maturities; typically 3-5 year bonds

– Majority is fixed rate debt, but several floating rate issues as well

– AAA, A and BBB rated tranches that are rated by DBRS, S&P and/or Moody’s

A and BBB tranches typically held by seller/originator, or niche investors in Canada

– Securitization norms apply:

backed by a pool of assets

bankruptcy remote from the seller

trigger events exist to protect investors from adverse developments

4

Market Overview - The Issuers

Card Issuer ABS Issuer Credit Card

Outstanding October 31,

2008*Schedule I BanksBank of Montreal Master CCT MC 3,097$ CIBC Cards II Trust Visa 3,502$ National Bank Canadian CCT MC 1,223$ Royal Bank Golden CCT Visa 3,747$ TD Bank York Receivables Visa -$ Schedule II BanksCapital One Algonquin CCT MC 1,500$ Citibank Cda Broadway CCT MC 1,811$ MBNA Gloucester CCT MC 2,526$ RetailersCanadian Tire Glacier CCT MC 2,765$ President's Choice Eagle CCT MC 500$ Total Total ABS Issuance 20,672$ * Source: Issuer reports; includes Class A, B, C notes

5

Market Overview - Issuer Reliance on Credit Card Term ABS

Card Issuer ABS IssuerTotal Credit Card

Receivables*

Total ABS Outstanding

Dec. 31, 2007**

% Financed Through

SecuritizationCIBC Cards II Trust 14,353.1 4,154.9 28.9%Royal Bank Golden CCT 12,769.1 3,650.0 28.6%Bank of Montreal Master CCT 7,128.5$ 1,500.0$ 21.0%TD Bank York Rec. Trust III 6,805.6 800.0 11.8%MBNA Gloucester CCT 6,660.0 2,899.0 43.5%Canadian Tire Glacier CCT 3,813.0 2,130.0 55.9%Citibank Cda Broadway CCT 3,694.5 950.0 25.7%Capital One Algonquin CCT 3,594.6 1,500.0 41.7%President's Choice Eagle CCT 2,070.3 500.0 24.2%National Bank Canadian CCT 2,025.8 1,200.0 59.2%Total 62,914.5$ 19,283.9$ 30.7%* Source: Nilson Report** Source: Issuer reports; includes Class A, B, C notes

6

Market Overview - New Issuance 2008YTD

Seller Issue Maturity Date

Spread at Issuance

(bps)Amount

($mm)BMO Master 2008-1 21-May-2013 213 525BMO Master 2008-2 21-Aug-2012 180 1,000Canadian Tire Glacier 2008-1 20-Feb-2013 150 600Citi Cards Canada Broadway 2008-1 17-Jun-2011 180 525Citi Cards Canada Broadway 2008-2 17-Jun-2013 195 250MBNA Gloucester 2008-1 15-May-2013 198 400National Bank CCCT 2008-1 25-Mar-2013 220 400Royal Bank Golden 2008-1 15-Apr-2011 200 500Royal Bank Golden 2008-2 15-Apr-2013 210 500 Total $4,700Source: BMO Capital Markets

7

Credit Card ABS vs. Other Structured Product

Canadian 3rd Party ABCP• Asset/Liability Mismatch – long-term assets funded with short-term liabilities

• Transparency – limited insight into asset quality

• Rating Agency Methodology – DBRS did not require liquidity backstop

• Regulatory Oversight

Canadian Credit Card ABS• Alignment of Interests – strong between Seller/ originator and ABS debt holders

• Fraud – Assumed by seller/originator

• Modeling – simple, easy to understand cash flow models

• Track Record – one of first asset classes securitized

• Transparency/Disclosure – Monthly reporting on key collateral statistics; Canada needs to improve disclosure at least to U.S. levels

• Liquidity risk - short-term assets funded with long-term liabilities and structural features limits liquidity/refinancing risk

US Sub-Prime RMBS• Alignment of Interests – originate to securitize model

• Track Record - new asset class

• Modeling – rating agency models were flawed; both assumptions and stress testing

• Fraud – Significant fraud on origination

Other Structures – Key WeaknessesCredit Card ABS – Key Strengths

8

Canadian Credit Card ABS – Typical Transaction Structure

Interest and Principal

Proceeds of Notes

Seller/Originator (Bank or Retailer)

Payment for Trust Assets ($1.0 billion)

Credit Card Master Trust Receivables = $1.07 bln

Credit Card Obligors

Principal & Interest

Credit Card Receivables ($1.07 bln)

Series I Series II Series III

AAA notes

A notes

BBB notes

AAA notes AAA notes

A notes A notes

BBB notes BBB notes

Total debt = $1.0 blnAAA debt = 80-95%Sub-debt = 5-20%

Seller’s Co-ownership interest = 6.5%Co-ownership interest ≠ over collateralization

Investors’ Co-ownership interest = 93.5%

9

Transaction Structure – Key Features

• Two Principal Structures in Canada– Co-ownership Method (see diagram on previous slide) – Investor and seller/originator

own a co-ownership in the assets (credit card receivables)

– Sale of Receivables Method – key difference is that seller holds debt issued by the trust rather than a co-ownership interest

• Trusts are typically master trusts allowing for multiple series of debt to be issued

• Securitization norms apply– Trust must be a bankruptcy remote SPV– Perfected security interest in collateral– Subject to extensive legal documentation and well-developed legal criteria by the rating

agencies– Triggering events under conditions of credit deterioration– Cash is trapped upon a triggering event

Credit Card ABS – Revolving and Accumulation Periods

Receivables ($)

Invested Amou nt

Seller’s Interest

Investor’s Interest

R evolving Period Accumulation Period Expected

MaturityFinal Legal

M aturity

Time

C redit Card R eceivables

Credit Card ABS – Cash Flow Periods

11

Allocation of Collections

• The revolving period– begins on the closing date and ends on the earlier of (a) the accumulation period and (b) the early

amortization period

– the trust will not pay principal to, or accumulate principal for benefit of debt investors

– principal collections used to re-invest in new receivables

– Excess spread returns to seller/originator if no event of default

• The accumulation period– allows for the accumulation of funds so that the trust will be able to repay the principal amount of a

series in full on its expected final payment date

– during the accumulation period for a series of notes, principal collections allocated to such series will be deposited monthly in the principal funding account

• The early amortization period– commences on the occurrence of a triggering event

– principal collections distributed on a monthly basis to repay each class of notes in priority

• Interest collections– Similar priority in all periods; trust expenses, senior notes, sub notes, etc.

12

Early Amortization Events

• Early amortization events are designed to help protect investors from adverse developments. Typical events include:

– three-month average excess spread is zero

– bankruptcy, insolvency or similar events relating to the seller

– the seller is unable to assign receivables to the trust

– a servicer default occurs

– breach of minimum seller’s interest

– an event of default occurs

– notes are not paid in full on their expected payment dates

13

Key Definitions

• Gross Yield (annual rate)– Total revenue received by the trust ÷ average receivables

– Revenues include all interest income, charges, and fees including interchange fees (Golden Credit Card Trust is the exception – Interchange is excluded)

• Charge-offs (annual rate)– Total receivables written-off ÷ average receivables

• Excess Spread = Gross yield minus charge-offs minus cost of debt minus expenses

• Payment Rate (monthly rate)– Total payment received by the trust ÷ average receivables

– Measures how quickly cardholders pay-off their credit card balances

• Purchase Rate (monthly rate)– Typically viewed as a ratio of purchases to payments (by cardholders)

– Ratio < 1 = portfolio is shrinking; ratio > 1 = portfolio is growing

14

Structural Considerations - Credit Enhancement

• The three most common sources of credit enhancement are:– excess spread– cash accounts– subordinated bonds

• Excess spread– first level of defense against deteriorating collateral performance

– measures the profitability of the business – revenues versus expenses:

revenues consist of the yield from the portfolio as well as any other ancillary fees or service charges that are made available to the structure

expenses consist of trustee fees, replacement servicer fees, losses and interest on the notes

– so long as revenues exceed expenses, excess spread will be positive and sufficient cash flow will exist to service the debt

15

Credit Enhancement – Excess Spread

0%

5%

10%

15%

20%

25%

30%

Algonquin Broadw ay CCCT CARDS II Eagle Glacier Gloucester Golden MCCT York

Excess Spread

Servicer FeeCost of Debt

Charge Offs

Source: BM O Capital M arkets, Issuer Reports

16

Deterioration Required to Trigger Excess Spread

Issuer Algonquin Broadway CCCT CARDS II Eagle Glacier Gloucester Golden MCCT YorkExcess Spread Trigger 0.0% 0.0% 2.5% 0.0% 2.0% 2.0% 0.0% 2.0% 2.5% 2.0%Calculated Excess Spread 11.0% 6.1% 10.2% 8.8% 10.0% 9.7% 9.0% 6.8% 14.7% 14.3%

Rqd Decline in Gross Yield* -55% -35% -41% -51% -43% -39% -51% -35% -57% -59%Rqd Increase in Charge Offs* 344% 230% 386% 355% 353% 274% 326% 397% 772% 733%* Required change from 2007 actual levelsSource: BMO Capital Markets; Issuer Reports

17

Credit Enhancement – Cash Accounts

• Cash accounts– are typically the next level of defense against deteriorating collateral

performance

– this form of credit enhancement is typically dynamic – that is as collateral performance declines, the amount of cash required to be kept in the cash account increases

– it is important to determine if whether a particular structure allows for the senior (AAA rated) tranche to dip into the cash account or whether it protects the subordinate (A and/or BBB rated) tranches exclusively

– they may have a variety of names including reserve account, cashreserve account or spread account

18

Cash Account Build Events

• As an additional source of protection for investors in the event of deteriorating performance, excess spread will be trapped in the trust and not repaid to the seller if it declines below specified levels.

• The maximum allowable amount accumulated is typically 5% of oustanding debt

• For example

Three Month Average Excess Spread Percentage

Excess Required Spread AccountSpread (% of total debt)

5% - 6% 2.5%

4% - 5% 3.0%

3% - 4% 4.0%

2% - 3% 5.0%

<2% 6.0%

19

Credit Enhancement - Subordination

• Subordinate bonds

– the subordinate (A and/or BBB rated) tranches provide credit protection to higher rated tranches by subordinating their right to receive collections

– typically interest on the senior tranche will be paid prior to the subordinate tranche receiving an allocation for interest

– the same holds true for principal – the subordinate tranche will not receive any allocation of principal until the senior tranche has been paid fully, deposited into the principal funding account in full

– in the event of insufficient collections (if all excess spread and the other credit protection has been eroded), the senior tranche could be effectively kept current while payments on the subordinate tranche will be suspended

– continued insufficient collections could result in the non-payment in full of the subordinate tranche

– Subordination ranges from 4.5%-5% (Tier I) to 20% (Algonquin)

20

Total Credit Enhancement

0%

5%

10%

15%

20%

25%

30%

35%

Algonquin Broadw ay CCCT CARDS II Eagle Glacier Gloucester Golden MCCT York

Subordination

Spread Account

Excess Spread

Source: BM O Capital M arkets, Company Reports

21

Credit Quality - Collateral Performance

• The performance of Canadian credit card master trusts1 has been stable and consistent:

– low charge offs reflecting Canadian conservatism

– high payment rates reflecting convenience rather than credit use

– portfolio yields provide robust excess spread

1 Simple average of the eleven trusts that have term ABS outstanding.

Monthly Performance - Canadian ABS

0%

5%

10%

15%

20%

25%

30%

35%

May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08

Payment Rate Gross Yield Charge Offs

Source: Company reports; BMO Capital

22

Credit Quality – Portfolio Characteristics


Portfolio Size (generally) Losses

Payment Rate

Enhancement Level

Schedule I Banks large low high-med lowSchedule II Banks medium higher lowest highestRetailers small-med low-high med-high med-high

23

Collateral Performance – Gross Yield

Gross Portfolio Yield Peer Comparison

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

n= 6

Algonq

uin n= 4

Broadw

ay n= 5

CCCT

n= 5

CARDS II

n= 6

Eagle

n= 8

Glacier

Trust

n= 8

Glouce

ster

n= 8

Golden n= 5

MCCT

Annual high and low for 'n' years

LTM high and low

Mean


24

Collateral Performance – Charge Offs

Charge-Off Peer Comparison

1%

2%

3%

4%

5%

6%

7%

8%

9%


LTM high and low

Mean


25

Collateral Performance – Payment Rates

Payment Rates Peer Comparison

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

n= 6

Algonq

uin n= 4

Broadw

ay n= 5

CCCT

n= 5

CARDS II

n= 6

Eagle

n= 8

Glacier

Trust

n= 8

Glouce

ster

n= 8

Golden n= 5

MCCT


LTM high and low

Mean


26

Stress Testing Cash Flows - Rating Agency ‘AAA’ Stress Tests

Constant for highly rated banks; declining for

retailers

Constant for highly rated banks; declining

for retailers

Dependent on credit quality

Purchase Rates

45-55% stressup to 75% stress35-50% stressPayment Rate

1.5x-2.0x initially increasing to 3x-5x

2.0x initially increasing to 3x-5x

4.0x-5.0xCharge Offs

stressed yield is 11-12% 40-70% decline 11.5% floor on prime

portfolios

30-45% declinePortfolio Yield

S&PMoody'sDBRS

27

Stress Testing Cash Flows Results – Moderate Stress

Variables Stressed As Follows:

• Charge-offs increased 200-300% from current levels

• Gross Yield Stress @ 10-20% of current levels and deduct 2% alternative servicer fee

• Assume cash collateral account has built to max. level (5-6%)

• Purchase rate declines to 0%

Time to Repay ‘AAA’ Debt is Highly Sensitive to Payment Rates

Purchase Rate = 100%

Purchase Rate = 50%

Purchase Rate = 0%

Schedule I Banks 7-8 10-11 12-14Retailers 11-12 14-15 22-25Schedule II Banks 21-27 27-35 >36 months

Months to Repay 'AAA' Debt

28

Stress Testing Cash Flows Results – Severe Stress Scenario

Variables Stressed As Follows:

• Charge-offs increased by 400% from current levels

• Gross Yield Stress at 50% of current levels; deduct 2% alternative servicer fee

• Payment Rate Stress decreased by 70% from current levels

• Assume cash collateral account has built to max. level (5-6%)

• Purchase rates stress at different levels

Not all ‘AAAs’ Are Created Equal

Purchase Rate = 100%

Purchase Rate = 50%

Purchase Rate = 0%

Schedule I Banks 7-8 10-11 12-14Retailers 11-12 14-15 22-25Schedule II Banks 21-27 27-35 >36 months

Months to Repay 'AAA' Debt

29

Historical Experience – Credit Card Performance

• Canadian Experience– Eaton (bankrupt Canadian retailer) credit card trust – ‘AAA’ went into rapid amortization

and debt fully repaid

– Schedule I Bank credit card charge-offs peaked at 4-5% during last recession (early 90’s)

– Glacier (Canadian Tire) charge-offs peaked at 8.2% in early ’90s; no earlier data available

• Outlook for Canada– Delinquencies doubled in the recessions of the early 90’s and early 80’s; no data for charge-

offs

– Canadian household debt is at record levels, but housing affordability remains within norms

– Consumer bankruptcy rates 0.25% to 0.40% peak to trough in 90’s recession

– Charge-off rates are directly related to unemployment rate levels and consumer bankruptcy rate

– Charge-offs are clearly poised to increase in 2009; prior data makes it difficult to estimate peak

30

Historical Experience – Credit Card Performance

• U.S. Experience– Charge-offs: AMEX charge-offs have almost doubled to 6%; BofA charge-offs up 40%;

average levels now 5-7%; up from 3-5%

– Metris Master Trust: specialty financeco bought by HSBC in 2005; did not go into rapid amortization; charge-offs peaked at 15% in ’02

– NextCard Credit Card Trust: a subsidiary of specialty retailer Spiegel; NextBank went into receivership in June/02 and all series of debt went into rapid amortization. Collateral performance deteriorated, with charge-offs more than doubling to >11%, but the portfolio yield remained stable; limited risk to ‘AAA’ debt

– First Consumers Master Trust: This trust was established by First Consumers Bank, which was a subprime-focused bank and went into insolvency in 2002. At the time, charge-offs hit 14% and payment rates had declined to 11% from 17%. The portfolio deteriorated further with charge-offs increasing to 30% for a six-month period and then eased somewhat to 20%. Payment rates ultimately decreased to 5%. All ‘AAA’ debt was fully repaid

• U.S. Outlook– Moodys: Estimates charge-offs will increase to 8.5% by Q4/09; also assumes

unemployment will peak in Q4/09

– Issuers: Taking aggressive action to reduce exposures and write-offs

31

Credit Card ABS – Spread Performance


5- Yr ABS vs. 5- Yr RY Deposit Note DifferentialIndicative Spread Levels

-40

-20

0

20

40

60

80

100

120

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Glacier / Foreign Bank vs. RY Deposit Note

Canadian Bank Credit Card vs. RY Deposit Note

Source: BMO Capital Markets

32

Summary – Canadian Credit Card ABS

• High and stable credit quality– Alignment of interests between Seller of receivables and the trust

Importance of residual cash flows to Sellers

Seller incurs first loss if there is a deterioration in performance

– Relatively stable performance of Canadian credit card trusts; no noticeable credit deterioration of portfolios; Canadian credit card ABS collateral is outperforming U.S. trusts

– Relatively simple structures based on real cash flows

– Cash flow sensitivities - substantial downside protection for ‘AAA’ tranches

– Preference for Canadian Schedule I bank sponsored trusts

• Attractive spread levels and relative value– Spreads are at historical wide levels

– Spreads are at historical wides in relation to bank deposit notes

– Spreads are wider than for some lower-rated corporate debt issuers

credit card asset backed securities overview and...

Documents