Beyond the excitement of new payment technologies and competitive card markets is the world of Asset Backed Securities, a back office financial function which allows card issuers to place credit card receivables in the hands of investors. Securitizations are a massive market. In 2018, there were 1,198 total deals valued at $674 billion, across all collateral classes and countries. Credit Card securitizations amounted to 70 deals globally, for $44 billion.
Royal Bank of Canada kicks off the new year with a large Asset Backed Securitization (ABS) deal, which Payment Source’s Asset Securitization Report announces today.
- Royal Bank of Canada is pricing the first U.S. credit-card securitization of 2019 with a package of Canadian credit-card receivables.
- Golden Gate Credit Card Trust (GCCT) 2019-1 will issue a single tranche of U.S.-dollar $550 million Class A notes package backed by payments on consumer and small-business Visa and Mastercard credit cards issued by RBC.
Although credit card lenders of any size can securitize their recievables, there are some size practical considerations on size. Only one deal in 2018 was less than $100 million in book value. The sweet spot for a deal is around $500 million; the top deal in 2018 was by Citi, at $1.8 billion.
Card issuers that place securitizations in the market have a leg up on smaller issuers. The deals allow issuers to take concurrently take portfolio risk off their books, and generate servicing fees. Some deals allow the issuance trust to collect interchange on accounts; others book the income to the core business.
The ABS market experienced angst after the recession because of overleveraging, particularly with mortgage backed securities. Dodd-Frank brought tigher controls which stablized the market.
ABS deals rely on the performance and future expectation of credit loss performance. Most issuers use the FICO score to project risk; many use the FICO score from cradle-to-grave. Issues often use the score at the acquisition point, manage the account through the credit life cycle with the score, then place their portfolio into capital markets with the same baseline score.
Mercator Advisory Group clients subscribing to the credit practice will have access to a major report in February 2019 that defines the market, explains the nuances of a successful deal, and projects the market through 2022.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group