Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors

CHAPTER 4

Credit Card ABS

John N. McElravey, CFA

Senior Analyst

Wachovia Capital Markets, LLC

Credit cards have become ubiquitous in American society. Given their unique place in household transactions, it is not surprising that credit card asset-backed securities are generally acknowledged to be a benchmark asset-backed securities (ABS) sector. Credit card ABS made their first appearance in the public debt markets in 1987. The large dollar amount of new issue transactions introduced liquidity and drew many new investors to the ABS market. In addition, the strong credit ratings of the banks that make credit card loans and sponsor the securitizations eased the concerns of investors branching into a new asset class. Indeed, investors new to the ABS market will often begin by buying AAA rated credit cards.

As investors gain experience, they may move down in credit to subordinate credit card ABS or then branch out into other ABS sectors. For example, many Asian investors with dollars to invest started in the Treasury and agency markets, and then moved into credit cards to pick up additional yield without taking on undue credit risk. Pricing spreads of credit card ABS are often used as a point of comparison for other ABS sectors. In turbulent market conditions, the credit card sector will often recover first. Good liquidity in terms of overall investor demand and narrow bid-ask spreads from dealers make credit card ABS ideal as a source of liquidity in portfolios. This chapter summarizes ...