Sears Chargeoffs Hit 9.5%

Standard & Poor’s CreditWire 5/18/98 — Standard & Poor’s affirmed its ratings on the outstanding series of Sears Credit Account Master Trust II investor certificates (see list below).

This rating action follows a proactive move by Sears to alleviate investor concerns of rising loss rates by raising credit enhancement levels on all of its publicly-rated credit card-backed securities issued out of Sears Credit Account Master Trust II.

This increase in enhancement across all series illustrates Sears’ commitment to protecting investors. Sears has boosted enhancement for its publicly-rated, fixed-rate deals by increasing the size of each seller-retained C class by 400 basis points (Standard & Poor’s does not rate seller-retained C classes). As a result, total credit enhancement to the triple-‘A’ certificates increased from 11% to 15%. The credit enhancement associated with series 1998-1 will reflect these new levels.

Reported gross charge-offs increased steadily during 1997 but have leveled off during the first quarter of 1998 at about 9.5%. As of the April 1998 reporting period, the three-month average charge-off rate was 37% higher than the 6.7% charge-off rate recorded in April 1997 period. The increase in gross charge-off rates during 1997 has raised significant credit quality concerns. As part of its routine surveillance process, Standard & Poor’s has maintained an ongoing dialogue with Sears’ management and has been closely monitoring portfolio performance trends.

Partially offsetting the rise in charge-off rates, in January 1998, Sears began including recoveries from charged-off accounts in finance charge collections available to certificateholders. The inclusion of recoveries has boosted portfolio yield by 160 to 200 basis points. This increase is due to the fact that certificateholders receive 100% of the recovery stream, while the seller retained certificates receive no benefit. The inclusion of recoveries, along with the recent stabilization of losses, has had a positive impact on excess spread. In the last four months, three-month-average excess spread in the trust has improved steadily, moving to 4.88% in April from 3.37% in January.

Separately, On May 14 Sears announced that the company had entered into an long-term agreement with Total Systems Inc. to provide certain computer processing services. Sears expects the system conversion to enhance its ability to effectively manage its Sears credit card accounts. The conversion will be the largest in the history of the credit card industry, affecting 60 million accounts. The conversion is expected to temporarily cause an increase in charge-offs since it will change the methodology used to age delinquent accounts. Currently, delinquencies are calculated based on the scheduled monthly payment and the amount past due. The new aging methodology determines delinquency levels based on the number of billing cycles that have elapsed since the customer’s last payment, a practice common in the bankcard industry.

To measure the impact of the new methodology on delinquency statistics, Sears used historic account activity from a 10% random sample of accounts to simulate the difference between the current and new methodologies. The simulation showed that charge-offs increased by 75 to 100 basis points following the conversion and declined close to original levels 12 months after the conversion. We expect excess spread to be negatively impacted due to the conversion, however its effects should be mitigated since the conversion is expected to take place in three phases with an expected completion date sometime in the second quarter of 1999, Standard & Poor’s said.

OUTSTANDING RATINGS AFFIRMED

            Rating  Original Initial   Revised Initial
Certificate Balance Certificate Balance

Series 1994-1

  Class A      AAA        $750,000,000  $750,000,000
  Class B      A           $33,500,000   $33,500,000
  Class C                  $59,197,000   $98,857,000

Series 1995-2

  Class A      AAA        $600,000,000  $600,000,000
  Class B      A           $26,970,000   $26,970,000
  Class C                  $47,192,000   $78,917,000

Series 1995-3

  Class A      AAA        $500,000,000  $500,000,000
  Class B      A           $22,500,000   $22,500,000
  Class C                  $39,330,000   $65,740,000

Series 1995-4 (Note A)

  Class A       AAA       $500,000,000  $500,000,000
  Class B       A          $22,500,000   $22,500,000
  Class C                  $37,180,000   $61,330,000

Series 1995-5

  Class A       AAA       $500,000,000  $500,000,000
  Class B       A          $22,730,000   $22,730,000
  Class C                  $45,520,000   $65,520,000

Series 1996-1

  Class A       AAA       $500,000,000  $500,000,000
  Class B       A          $22,500,000   $22,500,000
  Class C                  $39,330,000   $65,740,000

Series 1996-2

  Class A      AAA        $500,000,000  $500,000,000
  Class B      A           $22,500,000   $22,500,000
  Class C                  $39,330,000   $65,740,000

Series 1996-3

  Class A      AAA        $500,000,000  $500,000,000
  Class B      A           $22,500,000   $22,500,000
  Class C                  $39,330,000   $65,740,000

Series 1996-4

  Class A      AAA        $500,000,000  $500,000,000
  Class B      A           $22,500,000   $22,500,000
  Class C                  $39,330,000   $65,740,000

Series 1997-1

  Class A      AAA        $500,000,000  $500,000,000
  Class B      A           $22,500,000   $22,500,000
  Class C                  $39,330,000   $65,740,000

Note A: As a result of scheduled amortization, the present amount of Class A equals $375,000,000 and Class C equals $55,169,551

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Indonesian Card Bonds Downgraded

Duff & Phelps Credit Rating Co. (DCR) has downgraded the ratings of its Indonesian bank and structured transactions.

All the ratings remain on Rating Watch–Down.

The following transactions and bank ratings have been downgraded to ‘B-‘ (Single-B-Minus):

*  P.T. Bunas Finance TBK Auto Loan Receivables     *  P.T. BII Trust Certificates Credit Card Receivables     *  P.T. Bank International Indonesia Foreign Currency (sr. unsec.) Local Currency (sr.unsec.)

The rating downgrades and the continuation of Rating Watch–Down status reflect the deteriorating creditworthiness of the government of Indonesia as a result of the increasingly unstable political situation in the country. Social unrest in the capital city and elsewhere in the country, sparked by economic decline and rising prices, have put the viability of the Suharto government in question.  As a result, the operating environment for these structured transactions has worsened.

The ratings assigned to P.T. Bank International Indonesia positively incorporate the current level of financial support supplied by the Sinar Mas Group.  Although it remains unclear if social unrest can be contained and an environment of normalcy restored (within which the IMF-supported economic program can move forward), DCR believes — at the present time — foreign exchange resources (at approximately US$15 billion), remain sufficient to cover sovereign debt service payments.  Further deterioration in the credit fundamentals could put sovereign debt service coverage at risk. DCR continues to monitor developments in Indonesia closely.

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Jay Jacobs Card

Seattle-based specialty apparel retailer  Jay Jacobs will introduce its new private label credit card tomorrow. The ‘Jay Jacobs Credit Card’ offers 10% off the first purchase with the card; exclusive discount coupons; special previews of upcoming fashion collections; and advanced notice of special sales and in-store events. The retailer operates in 105 mall locations in 19 states. The card is being issued in partnership with SPS Payment Systems.

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PMT Alligator

ISO leader PMT Services, Inc. swallowed yet another portfolio yesterday with the signing of a definitive agreement to acquire MBN National, Inc., an ISO headquartered in the Los Angeles area. This marks PMT’s ninth acquisition of the current fiscal year.  MBN will bring a merchant portfolio of approximately 8,000 accounts, producing annualized charge volume of approximately $400 million, to PMT. In addition, PMT will gain a seasoned sales force through the transaction, which is currently generating approximately 300 accounts per month.  The latest transaction will increase PMT’s internal account generation capability to approximately 4,000 merchant accounts per month from as few as 300 accounts two years ago.

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Indonesia Trouble

The American Express Travel Office in Jakarta has beefed up security and continues to provide services throughout the current difficulties.  The customer tele-servicing center has been continuing to operate on a 24-hour basis with backup support from the company’s regional operating centers across Asia.  AmEx also established additional customer services facilities in a Jakarata hotel. The company has chartered a number of aircraft for the timely evacuation of cardmembers and travelers. There is no estimate on when the civil unrest may settle.

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New CheckFree EVP

CheckFree announced Monday that John Limbert will join the company as EVP of customer operations, effective immediately.  Limbert will be responsible for all of CheckFree’s electronic commerce customer operations, including customer care, payment operations, implementations, system conversions, and customer operations planning and development. Prior to CheckFree, Limbert spent 20 years with Banc One, most recently as head of its Eastern Region Consumer Banks.

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Deposit Access

Deposit access products will account for the single largest share of transactions in the global payments by the year 2005, according to MasterCard CEO Robert Selander, who spoke at the company’s Asia/Pacific Regional annual meeting in Perth, Western Australia last week. Over the past five years, since Maestro was launched in Asia/Pacific, the global debit program has reached 40 million cards in the region and is projected to grow to 100 million by the year 2000. Selander commented that emerging platforms such as chip and deposit access are two areas that member financial institutions should be focusing on to position themselves competitively and strategically for the future.

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Card Scam Settles

The FTC, the Illinois Attorney General and four Chicago area defendants announced a settlement Friday in a case stemming from a national crackdown on credit cards marketed for an upfront fee. The defendants promised consumers a major credit card with a high credit line for a $97.50 processing fee. Instead consumers received a ‘Consumer Express’ card only good for purchases from a high-priced, mail order catalog. The group operated under several names including: Creative Concepts, Premier Card Services, Premier Services, Tower Financial Services, Tower Services, Prime Credit Services, Prime Services, Colonial Financial Services, Colonial Financial, and Consumer Express.

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TCM Card Bank Opens

The OCC authorized the IBAA Bancard’s limited-purpose credit card bank to open for business this morning. TCM Bank, N.A. will deliver credit card services to community banks through Bancard’s ‘Total Card Management’ program. The bank will provide an agent bank option for IBAA member banks who prefer to issue VISA or MasterCards risk-free or who prefer not to manage their own card program through IBAA’s ‘Bancard Direct’ program. IBAA members are wary of agent relationships with major national issuers especially big card issuers who cross-sell products to the bank’s customers. Equifax Card Services, a longtime service IBAA service partner, will provide processing support for TCM.

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Vacation Planning

When U.S. consumers were surveyed recently by MasterCard International, 37 percent said the one thing they think about most before traveling is payment products, ahead of clothes (29 percent), identification (14 percent), and medication/medical information (11 percent). Yet, when it comes to actually planning budgets, “packing” their wallets, and other financial preparation, 40 percent of Americans spend no time at all and 91 percent spend less then 30 minutes.

“Although Americans recognize the need to prepare financially for vacation, most travelers do not spend the necessary time organizing a financial game plan before leaving home,” said Mary Alice Kellogg, consumer travel expert and editor of Delta Airline Shuttle’s in-flight magazine. “Every traveler should take at least thirty minutes before leaving home to formulate a plan and should seriously consider using debit and credit cards to enjoy favorable exchange rates, worldwide acceptance and convenience, and a host of related services while traveling. Actions such as setting a budget, determining the best ways to pay, and how and where to access funds while traveling are important steps which can literally pay dividends on everything from getting some of the best exchange rates to having local, reputable assistance in case of an emergency.”

While taking a credit card on vacation is very common today, savvy travelers also are starting to understand the benefits of traveling with a debit card. Used as a safe alternative to carrying lots of cash and more convenient and widely accepted than checks, debit cards enable travelers to access their home bank accounts at merchants and ATMs anywhere in the world. Because there often are questions about debit card usage and the advantages of this payment method, MasterCard and “Call For Action,” a consumer advocacy group, have created a brochure titled ‘A Smart New Way to Pay,’ which features information on using debit cards and is available to consumers who call 1-800-647-1756.

Properly Preparing to Travel

The key to properly packing wallets and financially preparing for vacations is organization. Taking inventory of finances, setting a budget, determining advantageous methods of payment, and ensuring wallets contain all necessary items will help travelers maximize their financial resources while traveling.

Consumers also should weigh the benefits of using a particular payment tool to make purchases while traveling. Things to consider include:

— Fifty-six percent of international travelers surveyed said they were interested in getting a good exchange rate when making purchases. In most cases, travelers using a credit or debit card to make purchases and to withdraw cash will receive close to the wholesale exchange rate, which is the most favorable exchange rate available to consumers.

— Making significant purchases on a debit or credit card that offers warranty protection will ensure items are protected against theft and damage.

— Using a co-branded payment card while vacationing can provide the added benefit of getting rewards when making purchases.

— When trying to maintain a budget, using a debit card, which draws funds directly from a cardholder’s checking account, can help keep track of spending and minimize post-vacation bills.

Travelers also should be aware of any special services their credit cards and debit cards offer. Often, travelers do not realize that their payment cards may provide services to help locate lost luggage, identify local medical services, and provide roadside assistance.

Traveling on a Budget For many travelers, finding ways to maintain a vacation budget is important. In the recent MasterCard survey, 75 percent of Americans set budgets before traveling. But according to Kellogg, many travelers will spend more than their original budget because they don’t properly track their spending and do not have varied resources for making purchases.

“A vacationer should have several payment options when they leave home. One smart option that often is overlooked is a MasterCard debit card,” said Kellogg. “Not only does it let travelers make purchases and access cash wherever MasterCard is accepted while on vacation, it also is a great tool for monitoring expenses and sticking to a budget, and it frequently provides special discounts and offers.”

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