Latest Innovation in the Packaging of Loans for Sale to Investors : B of A Offering Credit Card-Backed Debt
Bank of America announced Wednesday a $400-million public offering of securities backed by credit card loans, believed to be the first such offering ever.
The offering, already more than 60% sold, is the latest in the young but fast-growing field of “securitization,” or the packaging of loans for sale to investors.
The oldest and biggest sector of this field is first mortgages, now a $300-billion-plus industry. Securitized auto loans now account for about $10 billion annually, while other consumer loans being securitized or under consideration for securitization include credit card loans, home equity loans, second mortgages, mobile home loans, vacation time-share notes and boat loans.
The market for securitization of consumer loans, other than first mortgages, “will double or triple in size within a year,” said Miles Federman, a senior vice president in New York of Standard & Poor’s Corp., which rates such securities.
“We expect the whole field of asset-backed securities to blossom,” said Kristine Ball, an associate in the asset-sales group of Bank of America in San Francisco.
Craig Goldberg, New York-based vice president of First Boston Corp., which is the lead underwriter for the B of A offering, said he expects $2 billion to $4 billion of credit card-backed securities to be offered this year, with several other major banks and retailers expected to join the field.
Such deals provide benefits for consumers, investors and issuers. For consumers, the deals could result in lower interest rates on consumer loans, because securitization provides greater sources of money for lending. For investors, asset-backed securities often provide a premium yield over comparable securities. Bank of America’s credit card certificates, for example, carry maturities of about two years and are priced to yield 6.95%. That is about 0.65 of a percentage point above comparable yields on two-year Treasury bills, First Boston’s Goldberg said.
Source of Financing
For issuers, securitization provides a source of financing to write new loans or use for other purposes. It also allows the bank or other issuer to take the assets off its balance sheet. For B of A, that would increase its return-on-asset and capital-to-asset ratios. The latter ratio is important to regulators, who are keeping a watchful eye on B of A’s capital base in the wake of its recent massive losses.
However, there are risks to these investments. For example, the secondary market for the securities may be limited, which could make it difficult for investors to sell them before they mature. Also, in the case of the B of A offering, investors must absorb any losses if the default rate on credit card loans runs abnormally high.
Under the offering, B of A is packaging about 837,000 of its Visa card accounts, and investors buying the certificates--with a minimum denomination of $5,000--will receive the cash flows from repayments. The bank continues to service the credit card accounts and to maintain customer relationships, so account holders will not detect any difference.
The certificates, given top AAA ratings by both Standard & Poors and Moody’s, are being sold primarily to institutional investors, B of A said.
Although B of A is the first to make a public offering of securities backed by credit cards, another bank, Banc One of Columbus, Ohio, has made a private offering of such securities. (A private offering is usually sold to a small number of investors and faces fewer regulatory restrictions.)
A subsidiary of Republic Bank, based in Dallas, used its credit card loans earlier this year to back a $200-million debt offering. But that offering was not considered a securitization in the same sense as the B of A offering, because Republic’s debt offering will remain on its books and be treated as debt rather than a sale of assets, for regulatory purposes. Also, the cash flow from Republic’s credit card loans will technically not pass through to investors.
