Early into the new decade, it appears that credit card asset-backed securitizations (ABS) will have a relatively slow year if interest rates remain low, as we projected in the 2020 Credit Card Outlook for the U.S. market. Global Capital, a news source for capital markets, sees a similar trend.
Once a benchmark ABS sector, credit card bonds experienced a dramatic decline in issuance last year, leading to a big drop in trading activity that is expected to continue in 2020.
Credit card ABS issuance has “fallen off a cliff” over the last year, declining by 35.9%, according to Bank of America, from roughly $42bn in 2018 to $26bn in 2019.
The decline was largely driven by large bank sponsors like Citibank preferring to fund card receivables with cheap retail deposits rather than through securitization, BofA analysts wrote in a 2020 outlook report.
Kroll Bond Rating Agency in a 2020 outlook: “However, if either Chase or Citi reenter the market next year, supply could increase substantially.
There are three considerations for credit card managers to think about in the decrease in ABS volumes. We feel the shift is logical, and top issuers can adjust if surrounding metrics demand a counterstrategy. Here are our thoughts.
- First, there is an industry bet that interest rates, particularly the Prime, will stay low this year. If, for some reason, interest rates begin to rise, top issuers can quickly shift back into the market.
- Second, there is an expectation that loan loss reserves are adequate, and that delinquency will be stable. ABS deals can be held in abeyance, and should there be a downturn, and top issuers can peel off billion-dollar tranches to raise easy cash that can create a hedge against under-funded loan loss reserves.
- Finally, sound credit card receivables are money-in-the-bank for top issuers. They can ebb and flow their investor pools as strategies require. In low risk, low rate markets, there is no reason to offer high yield investment offerings; card issuers have the infrastructure in place to package and sell whenever they want.
For more detail on the ABS market, read Asset-Backed Securities: A Primer for Credit Card Managers, but keep this in mind: 2020 has the potential to be another strong year for U.S. credit card issuers, and the market is well aligned for success. Losses are low, delinquencies are stable, unemployment remains under 4%, and CECL (more conservative accounting requirements) has been delayed.
Keep your fingers crossed on the long overdue economic downturn, but if there is, top issuers have an ace-in-their-pocket with off-balance sheet ABS deals.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group