Upcoming Credit Card ABS Funding Fee

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A surge in consumer borrowing has prompted US credit card ABS issuers to seek funding for increased use of their products, while also keen to stay ahead of further rate hikes from the Federal Reserve.

Their business is certainly booming. As of the week of September 12, year-to-date credit card ABS issuance was US$21.44 billion, significantly higher than the US$8.62 billion for the same period in 2021. The ABS sector is on track for its busiest supply year since 2018, when issuers printed US$34.08 billion, according to Refinitiv data. Bank of America analysts predicted card ABS supply to reach $25 billion by the end of the year.

After consumers built up their savings in the early months of the pandemic, this year they are placing more purchases on their credit cards. Credit card and other revolving debt rose at an annualized rate of 11.6% in July, compared with 6.7% a year ago, according to Federal Reserve data.

Inflationary pressures mean consumers are “demanding more credit,” said Greg Handler, co-head of mortgage and consumer credit at Western Asset Management. “They try to keep up with inflation.”

ABS spreads have also tightened in recent weeks, due to more stable credit conditions, as well as a lack of supply, providing a sweet spot for issuers and investors.

Average secondary spreads on three-year Triple A-rated card ABS stood at Treasuries plus 40bp in the week of September 9, well below their recent wide of 76bp earlier this summer, data shows. from Bank of America.

But worries remain about what could happen to the market as the Federal Reserve continues to raise rates in the face of 40-year high inflation. The US central bank is expected to raise its key rates by 75 basis points to 3%-3.25% at its next meeting on September 21, which would be the highest rate since January 2008.

So far this year, late payments on securitized credit card receivables have remained low. Delinquencies over sixty days on prime bank card ABS averaged 0.58% in August, little change from the previous month, while delinquencies over 60 days on credit card ABS retail were flat at 1.65%, Fitch said in a report on Tuesday.

Attractive spreads

The latest deals have been warmly welcomed by investors who favor them for their liquidity and relatively attractive spreads over Treasuries of similar maturities, market participants said.

“It’s great to finally see some supply coming back,” said Eric Souza, senior portfolio manager at SVB Asset Management. “There’s just more demand than supply.”

After the Labor Day holiday, JP Morgan and the Royal Bank of Canada each credit card ABS rated Triple A to three years to eager investors. JP Morgan’s first credit card ABS of 2022, called Chase Issuance Trust 2022-A1, rose to US$1 billion from US$500 million, while Royal Bank of Canada secured strong orders for its third US dollar card ABS of the year, the US$800 million Golden Credit Card Trust 2022-4, a buy-side source said.

More credit card supply arrived last week. consumer lender Continental finance issued a $210 million non-preferred card securitization, called Continental Finance ABS Master Trust Credit Card 2022-A.

Still, it’s unclear how long market conditions will remain favorable for card issuers to come to market. Last week’s consumer inflation data sparked a rout in the bond market, sending two-year Treasury yields to 3.88% last Thursday, their highest levels since November 2007, data showed. Refinitiv.

For now, fund managers are eager to deploy their cash to buy card ABS.

“A lot of people have dry powder. You have real returns on the short end of the curve,” said Daniel Oh, portfolio manager at Osterweis Capital Management.

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