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ABS: Maxed-out on credit cards

Investors get fat yields as rating agencies seek extra credit enhancement.

A determination to avoid a ratings downgrade drove issuance of subordinated UK credit card ABS from both BarclayCard and Capital One in late September. There is potential for similar rating agency pressure on the other bank issuers such as RBS and Morgan Stanley, but it is not clear that other borrowers would welcome public transactions.

The UK bank’s £111.8 million ($212.4 million) double-B rated Gracechurch Card Notes Series 2006-A printed at Libor plus 245 basis points in sterling and euros for a 2.1-year average life. Investors were offered £53.1 million of Capital One’s Sherwood Castle 2006-1 at 325 basis points over for a 3.8 year life. The US bank also printed a £50 million deal in a private transaction in the first quarter.


Both originators experienced deteriorating credit quality, which would not have surprised investors closely following the programmes. And with the agencies clearly signalling that they would downgrade without an injection of credit enhancement, these responsible borrowers were left with little choice but to pay up for selling double B rated debt. The spreads are equivalent to BB CMBS, an asset class for which investors have regularly demanded a premium, unlike granular consumer ABS.

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