Soft Credit-Card ABS Market May Add To Consumer Credit Woes

Last Update: 8/5/2008 7:38:00 AM

By Aparajita Saha-Bubna and Prabha Natarajan
Of DOW JONES NEWSWIRES

(This article was originally published Monday)

NEW YORK (Dow Jones)–Investors are growing wary of bonds backed by consumers’
payments on their credit-card debt, jamming up another debt market and making it
tougher for Americans to tap what has been one of the easiest places to get
credit.

Rising defaults on credit card payments coupled with a bleaker economic outlook
has spooked investors in the market where this debt is packaged and sold. This
means credit card issuers are losing money and will probably respond by
restricting to whom and how much they will lend. The result: Americans, many
already using credit cards to get by month to month, may soon find it harder, or
at least more expensive, to tap this credit for everyday purchases from gas to
groceries.

“Another shoe is dropping for the U.S. consumer,” says Christian Menegatti, lead
analyst at RGEMonitor.com, an economic consulting-and-research firm. “Credit
cards are the last resort for the consumer who can no longer use the value of his
home to sustain spending.”

Citigroup Inc. (C) reported a loss on securities made up of pools of credit card
loans, indicating growing wariness among investors in this corner of the
asset-backed market that had so far proved resilient.

The fourth-largest issuer by credit card volume lost $176 million in the second
quarter through its packaging of card loans into securities, compared with a gain
of $243 million a year earlier, according to an Aug. 1 quarterly filing with the
Securities and Exchange Commission.

The company attributed the losses to higher funding costs as investors demanded
higher returns to buy these securities, and the marking down in value of a
portion of these investments that Citigroup held. Of the nearly $202 billion of
credit card loans it manages, the company has bundled $111 billion of them into
securities to sell to investors.

Tepid demand in the asset-backed market, which is a primary source of funding for
credit card issuers, hurts in two ways. It raises the borrowing costs for these
companies, translating into higher rates for consumers. It also forces the
companies to keep more loans on their balance sheets, thus locking up funds they
could have extended to credit card users.

In the second quarter, delinquencies on its total credit-card portfolio ratcheted
up nearly 12% since the end of last year to about $4.27 billion. Delinquencies on
the securitized portion of that portfolio clocked a 16% rise during the same
stretch.

Citigroup was the second-largest issuer of asset-backed securities of consumer
loans, mostly credit card debt, according to Dealogic data.

The credit card issuer is also vulnerable because it has a large exposure to
so-called private label credit cards - those affiliated to a particular retailer
- with a $55.2 billion portfolio. These type of credit cards typically have
higher loss rates as opposed to general purpose cards, say analysts, because a
consumer would rather jeopardize access to credit from a particular store rather
than fall behind on a credit card that may be used to pay for an array of items
and services.

The company, like its peers, has also squirreled away more funds for potential
losses.

“The fundamentals of consumer asset-backed securities will likely take a back
seat for now under the barrage of credit headlines and bankruptcy speculation,
not to mention oil,” said Chris Flanagan, head of global structured finance
research at JPMorgan, in a research note Monday.

Spokespersons from Citigroup and American Express were unavailable for comment.

Indeed, alarmed by rising delinquencies and the specter of higher unemployment,
investors are steering away from securities backed by credit card loans or
demanding higher returns.

For instance, a $1 billion offering of packaged credit card loans from American
Express (AXP) sold at costlier terms Friday as risk premiums have widened by as
much 10 to 25 basis points for these type of transactions in the past month.

“Deal flows have slowed considerably and deals taking longer to market,” Flanagan
said in the report.

Credit card issuance in the asset-backed market has fallen 56% from March through
July, according to JP Morgan Securities Inc.

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