Originator: MBNA Europe Bank
Size: £10 billion maximum aggregate nominal amount
Arranger: Barclays Capital
Date: August 3 2004
MBNA Europe Bank has imported delinked securitization technology from the US, increasing the flexibility of its European credit card-backed ABS deals.
Until now, European credit card deals have been single-issuance, full capital structure deals. In a delinked deal, an issuer can issue tranches of securitized debt without having to issue differently rated tranches at the same time. If each tranche meets its enhancement requirement, then, subject to repayment tests, an issuer can sell junior and senior notes at different times and with different maturities.
MBNA Europe’s delinked programme is backed by credit card receivables in one of its existing receivables trusts. The trust holds receivables for three issuers ? Deva One, Deva Two, and the newly created Deva Three.
The issuers invest in the trust. Deva Two funds its investment by issuing notes directly into the market. Devas One and Three sell notes indirectly by issuing loan notes to special purpose vehicles set up by Chester Asset Receivables Dealings Issuer Limited (Cards).
Deva Three is the key to delinking the programme. Structurally no different to its siblings, it holds a much simpler interest in the trust and issues its loan notes differently.
Devas One and Two are allocated their investor interest on a deal-by-deal basis. The trust has already split the money up and earmarked each portion to back a different class of notes in a single-issuance transaction. The money cannot be used for cross-collateralization. Deva Three, on the other hand, gets a lump sum from the trust each month.
Deva Three can behave differently because it enters into different contracts. ?Its new programme documentation contains the calculations that allow Deva Three to allocate cash flows in different manners, depending on what senior or subordinated notes have been issued or are planned to be issued,? says Debashis Dey, a partner at Clifford Chance who advised MBNA Europe.
Deva One issues class A, B, and C loan notes to a new Cards SPV for each series. The SPV then issues class A, B, and C notes to investors in the same proportions, achieving the necessary subordination to enhance the senior notes’ credit.
But Deva Three reaches investors by issuing a global loan note to a single Cards MTN vehicle which can then issue notes in different sizes and currencies, at different tenors and ratings, and at different times. The amount outstanding under the global loan note is increased with each MTN issue.
The decision on when to issue what type of notes, previously taken at trust level, is now taken at Deva Three level. So MBNA can match senior and subordinated note issuance more closely to investor demand.
At the end of July, MBNA priced a seven-year £300 million ($540 million) delinked AAA sterling tranche at three-month Libor plus 18 basis points. This followed two earlier euro tranches totalling e300 million. Settlement was on August 3, with Barclays Capital, Deutsche Bank, and JPMorgan as lead dealers.
With a dedicated ABS MTN issuer, MBNA can get to the market in weeks rather than months, saving time and money and cutting execution risk.
Note-by-note credit enhancement makes for more efficient treasury management. Class A noteholders don’t mind where their enhancement comes from so long as it amounts to the agreed percentage. This gives issuers more choice over when to issue A-rated notes or BBB notes.
In a single-issuance deal, enhancement that supports the middle-ranking class B notes also indirectly supports the senior class A notes. In a delinked deal, class B notes that are not supporting class A notes are known as unencumbered notes.
?If B notes are unencumbered, the amount of C notes needed to support them can be calculated as a fraction rather than a multiple of the B notes,? says Clifford Chance partner Kevin Ingram. ?Issuers don’t have to supply huge volumes of BBB paper just to support their single-A notes if they don’t want to issue AAA at that time.?
Shorter-maturity subordinated notes can mature while they are still needed to support senior notes. A junior noteholder with, say, a three-year bond that is supporting a 12-year bond has a nine-year extension risk. The subordinated notes can’t be redeemed until the issuer stops reinvesting principal and accumulates enough cash-collateralized senior notes, which are no longer susceptible to losses, to let it repay the junior notes.
Alternatively, an issuer can pre-fund its senior notes. But pre-funding means negative carry. To overcome this, MBNA has structured its delinked programme so that the trust can collect finance charges on those senior notes that still have full credit enhancement.
It took 14 months to set up MBNA’s delinked programme. ?Neither the UKLA [UK Listing Authority ? the FSA] or any other European stock exchange or listing authority has rules to allow this form of streamlined ABS MTN programme,? says Dey. ?It required a lot of dialogue with the UKLA to get something akin to a US shelf prospectus in place.?
Delinking should appeal to any issuer with a regular programme, such as a mortgage master trust, that wants to stagger its junior and senior note issuance.
According to Standard & Poor’s, credit card issuers’ delinked note trust structures contributed to record issuance in 2003 of rated ABS subordinated tranches in the US.
