Collateralized Debt Obligations: Structures and Analysis, Second Edition

CHAPTER 6

Review of Structured Finance Collateral: Nonmortgage ABS

We continue with our review of structured finance collateral in this chapter. Here we cover credit card receivable-backed securities, auto loan-backed securities, student loan-backed securities, SBA loan-backed securities, aircraft lease-backed securities, franchise loan-backed securities, and rate reduction bonds.

CREDIT CARD RECEIVABLE-BACKED SECURITIES

A major sector of the ABS market is that of securities backed by credit card receivables. Credit cards are issued by banks (e.g., Visa and MasterCard), retailers (e.g., JC Penney and Sears), and travel and entertainment companies (e.g., American Express). Credit card deals are structured as a master trust. With a master trust the issuer can sell several series from the same trust.

Cash Flow

For a pool of credit card receivables, the cash flow consists of finance charges collected, fees, and principal. Finance charges collected represent the periodic interest the credit card borrower is charged based on the unpaid balance after the grace period. Fees include late payment fees and any annual membership fees.

Interest to security holders is paid periodically (e.g., monthly, quarterly, or semiannually). The interest rate may be fixed or floating—roughly half of the securities are floaters. The floating rate is uncapped.

A credit card receivable-backed security is a nonamortizing security. For a specified period of time, referred to as the lockout period or revolving ...