Exodus Begins as Accounting Threats Grow
Fears that the Financial Accounting Standards Board's FAS 167 rules would push issuers out of the asset-backed bond market are beginning to be realized.
As banks formulate their funding plans for 2010, Bank of America, Capital One, J.P. Morgan and other institutions are coming to view securitization as a less-appealing capital source - given projections that the new accounting guidelines would vastly increase the reserves associated with such deals. The expectation is that they will curtail their issuance activity next year as a result.
While the accounting provisions laid out in FAS 167 will apply to all types of asset-backed bonds issued by banks, the impact is likely to be most significant for credit-card securitizations from the largest institutions, in part because of their prevalence in the market.
A pending rule change by the FDIC is also diminishing banks' interest in credit-card securitizations. That switch would remove a safe-harbor provision that currently protects securitized card receivables from seizure by the deposit insurer in the case of a bank receivership. Without that insulation, it would be difficult for banks with anything less than stellar unsecured-debt ratings to obtain triple-A grades for their card-backed bonds.
The FASB rules are still taking center stage, however. At issue is how banks would have to hold capital against securitized assets that currently get off-balance-sheet treatment, but would be brought onto their books under FAS 167. While the guidelines were finalized June 12, the government is only now determining how to set the related withholding requirements.
On Sept. 15, the FDIC, Federal Reserve, Office of the Comptroller of the Currency and Office of Thrift Supervision published a proposal in the Federal Register that would force banks to reserve funds against all "consolidated" assets. That would substantially increase the costs associated with securitizations by eventually forcing banks to raise billions of dollars against outstanding deals, let alone future issues.
The government agencies are seeking feedback from industry participants through mid-October. While the FASB rules and related withholding requirements are supposed to take effect Jan. 1 for most banks, some kind of phase-in period is possible.
In response to the forecasts of swelling capital requirements, "We are going to be taking a step back from the ABS world," CapOne securitization chief Richard Johns said on a panel at an American Securitization Forum seminar on Sept. 16 in New York.
J.P. Morgan chief executive James Dimon also said on a July 16 conference call that "it's unlikely . . . we'd be doing credit card securitizations at all in ."
Sources said Dimon's statement took the bank's treasury officials by surprise, adding that it would be improbable for J.P. Morgan to completely exit the credit-card securitization space. "It would be foolhardy to cut off your funding sources entirely," said one banker.
Nonetheless, Dimon's comments underscore banks' growing disenchantment with securitization amid a rapidly changing regulatory landscape. BofA has already turned to other funding sources, after ranking as the most active issuer of card-backed bonds in 2007 and 2008.
BofA has issued from its credit-card platform only once this year, placing $350 million of securities on May 28. But the bank's absence isn't completely due to regulatory pressures. It appeared to be interested in issuing bonds that would have qualified for buyer financing via the Federal Reserve's Term Asset-Backed Securities Loan Facility, but chose not to after discovering that its assets would be considered subprime under the program. It has reacted in part by issuing unsecured debt with protection from the FDIC's Temporary Liquidity Guarantee Program (see article on Page 1).
J.P. Morgan has issued $11.1 billion of credit-card bonds this year, according to Asset-Backed Alert's ABS Database. CapOne has kicked in $1.7 billion. All told, there have been $30.7 billion of such deals distributed in the U.S. so far in 2009.
As offerings from big banks fade, credit-card and auto-loan securitizations from "second-tier" issuers are likely to account for a larger proportion of new-deal flow. Sources mentioned credit-card lender First National Bank of Omaha as a candidate to take a higher profile, along with auto lenders CarMax and World Omni.
Citigroup, meanwhile, might maintain a steady pace. The bank, which has sold $9.5 billion of card-backed bonds in 2009, apparently views the upcoming rule changes as a turnoff, but doesn't have as many alternatives as some of its better-capitalized peers.
Securitization professionals have long anticipated the FASB rules with trepidation, with many sounding alarms that the changes could doom securitizations. That's especially true for commercial-paper conduits. As one market player said at the ASF seminar, "Life after FAS 166 and 167 is retirement."