BOSTON (MarketWatch) -- Issuers of credit cards may have yet another problem on their hands as fresh alarm bells go off on bonds backed by credit-card payments.
Rising defaults on credit-card payments, fueled by rising unemployment and a bleak economic outlook, are triggering clauses in these securities, underscoring the worsening quality in the underlying credit-card loans. This means the freeze in the asset-backed debt market, in which these securities are bought and sold, is unlikely to thaw soon.
Tepid demand in the asset-backed market, a primary source of funding for credit-card issuers, hurts in two ways. It raises the borrowing costs for these companies, translating into higher rates for consumers. It also forces the companies to keep more loans on their balance sheets, thus locking up funds they could have extended to credit-card users.
In 2008, issuance of credit-card asset-backed securities fell 37% to $56.5 billion from $89.2 billion in 2007, according to Dealogic.
The worsening trend in credit cards also spells additional misery for financial firms already weighed down by red ink on everything from soured mortgages to bad bets on capital markets.
The root of the problem is that growing numbers of cash-strapped and jobless borrowers are finding it increasingly difficult to make their monthly payments. These delinquencies are finding their way into securities made up of pools of credit-card loans. As losses rise, they trigger a so-called cash-trapping clause, little known outside the debt market.
This clause blocks funds left over in these securities from going to the credit-card issuers. This extra cash, also known as "excess spread," is the difference between income coming in from borrowers' credit-card payments such as fees for late payments and foreign exchange transactions, and, interest payments made to the investors of these securities. Typically, this extra cash would be routed back to the credit-card companies, but, because of the rising losses on the credit-card securities, this cash is now being used as a cushion to protect investors from losses.
http://www.marketwatch.com/news/story/trouble-plastic-alarm-bells-credit-card/story.aspx?guid=%7B8F1B5AE8-4AA3-43C9-B628-0203C9626E9C%7D&dist=msr_1I'm beginning to hate the bond market more than I hate Wall Street!
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