Credit card deals in 2011 saw the reemergence of mezzanine notes for the first time since the 2008 financial crisis, and industry players say subordinated notes might not be far behind. Speakers at the Credit Card ABS Sector Review panel at ASF 2012 in Las Vega noted the presence of B tranches on American Express and GE credit card transactions out last year and said it was a promising sign -- and that the market might see riskier credit card paper in the next few years.
Representing the issuer point of view, Kevin Sweeney, director at Discover Financial Services, said his firm was closely tracking spreads on card deals to try and determine when mezzanine or subordinated notes would make sense for them. “Discover is focused on where class B notes are trading, and we would consider [issuing class B notes] when net funding cost compare competitively to other channels,” he said. Discover is the number one issuer of new AAA rated credit card asset-backed securities since 2008.
Sweeney and other panelists said that more regular primary issuance would kick off riskier plays and bring infrequent issuers back to market. Some issuers have been sitting on the sidelines since the double whammy of the credit crisis and new accounting rules have buffeted the sector.
Much of the outstanding card volume is set to mature over the next few years, noted moderator Ellen Marks, partner at Latham & Watkins. If new issue deals don’t start to make up for the maturities, it could make the sector much less liquid. But panelists said they aren’t losing any sleep over that scenario. “There needs to be more use of ABS as a funding tool, or else there could be a liquidity problem,” agreed Steven Moffit, v.p. at Goldman Sachs. “But that’s far off.” He added the dearth of new deals seen in recent years wasn’t holding issuers back today. “Primary issuance volume is a function of what are other funding tools are available and what they cost,” he said.
Investor panelist Steven Juszczyszyn, v.p. at Delaware Investments, said he wasn’t troubled by the sector’s shrinking size either. “We watch decline in the secondary market supply, but it hasn’t had a significant effect on how we trade,” he said. “You ask the question, how relevant is the asset class going to be three or four years down the road? But it’s not an issue now. The technicals of the sector are strong.”