05/29/2009

BofA Unable to Clear Subprime Threshold

Even as other credit-card lenders rush to sell bonds for use in the Federal Reserve's Term Asset-Backed Securities Loan Facility, Bank of America is worried such a move would leave it with an unwanted stigma.

That's because under Fed guidelines, the Charlotte bank would be considered a subprime lender. According to Moody's, only 68.1% of the borrowers behind BofA's securitized credit-card accounts have FICO scores above 660. The Fed, meanwhile, doesn't consider card transactions to be of prime quality unless 70% of their underlying accounts are at or above that threshhold.

The upshot is that buyers of any TALF-eligible bonds from BofA would have to adhere to a more stringent down-payment schedule that the Fed applies to financing of subprime-loan securities through the program. Those "haircuts" aren't onerous on their own, ranging from 6-10% instead of 5-8%. But for BofA, the subprime label would represent a scarlet letter of sorts.

Indeed, all subprime assets have been toxic since mid-2007, when defaults among mortgages to borrowers with weak credit histories set off the worst financial crisis in a generation. "They don't want it out there in bright lights," one investment banker said.

At the same time, expectations are mounting that BofA will soon take steps to reduce the volume of low-FICO-score receivables in its securitization pools. Such a move might resemble one made by GE Capital in February, when the company pulled $1.6 billion of low-quality receivables from the collateral for its outstanding credit-card bonds.

The charge-off rate among GE's accounts has since dropped to 6%, from more than 10%, according to research from Wells Fargo. But BofA's reluctance to been seen as a subprime lender may actually cause the bank to think twice before attempting a similar maneuver. "Maybe . . . if they did something to the trust, then more people would know," an investor said, referring to an apparent lack of buy-side awareness that so many of BofA's borrowers are in subprime territory. In fact, many industry players still view the bank as a blue-chip issuer.

As for any new deals, BofA has been notable for its absence. The bank was the market's most frequent issuer of credit-card bonds in 2007 and 2008, with a combined $32.8 billion of issues in the U.S. But it hasn't returned since August, according to Asset-Backed Alert's ABS Database.

Rivals Citigroup and J.P. Morgan, meanwhile, have issued TALF-eligible bonds in recent months - with J.P. Morgan also completing a deal outside the program on May 15. And both are expected to be back with new TALF offerings in the coming months.

One source said that while BofA remains wary of putting together a TALF offering, it has been considering a deal that wouldn't qualify for Fed financing. In part, the issue would be aimed at taking advantage of falling funding costs, as spreads on even non-TALF-eligible credit-card securitizations have tightened by as much 400 bp since peaking in November.

Still, BofA's concentration of low FICO scores might prompt investors to demand wider spreads from the bank.

So far, only GE and World Financial Network have sold TALF-eligible credit-card bonds that fall into the Fed's subprime category - in both cases because the issuers declined to disclose credit scores for underlying borrowers. Both companies write card accounts on behalf of retailers, whose borrowers tend to default more often than bankcard customers.

Among BofA's securitized card accounts, 30.3% of borrowers have FICO scores below 660 and 1.6% have no scores. That's the highest among mainstream bankcard lenders. J.P. Morgan's securitization pools have low-FICO concentrations of 17-20%. Citi is at 26% for bankcard borrowers and 33% for private-label accounts.

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