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Thin Excess Spreads in ABS Raises Investor Concern

Among credit card asset-backed securities, recently reported excess spread levels on several fixed-rate, high-coupon transactions are now thin, and could trigger early amortization. At the end of May, six credit card ABS fixed-rate series reported three-month average excess spread below 2.00%. Fitch Ratings says this noncredit-related early amortization risk has also caused investors to gain a greater appreciation for trust structural nuances, particularly the prepayment protection offered by the various socialist, semisocialist, and nonsocialist structures. Fitch says that although limited, issuers maintain some flexibility in managing performance and prepayment risk. However, these options are broader portfolio management initiatives that would likely boost performance over time, including re-pricing accounts to boost portfolio yield, accelerating receivable growth in an attempt to dilute reported losses, and adding newly originated or better performing accounts to the trust. Fitch says that a relatively simple way to protect against the excess spread margin compression in these fixed-rate deals is to incorporate interest rate swaps into the transactions. A good example is MBNA Master “Credit Card Trust II,” which has several high-coupon, fixed-rate deals but has effectively hedged against the falling rate environment by employing interest rate swaps and their payments within the trust. As such, excess spread for MBNA fixed-rate transactions has remained relatively strong.