Credit Commentary

Bank of America shuns market, while the Rivals tap TALF

By Zarana on Wednesday, August 26 2009

JP Morgan Chase, Citigroup and American Express were among those who have taken advantage of TALF, the Fed's Term Asset-Backed Securities Loan Facility. Together, they've sold $21 billion in card-backed debt this year through the facility. But Bloomberg reports Bank of America, the only major card-issuer that didn’t sell any, lacks enough quality loans in its credit-card trust to sell TALF bonds without being labeled a subprime issuer.

Bank of America’s 13.8% credit-card default rate in July, the highest among the biggest lenders, helps explain why loans in its credit-card trust are shy of the threshold that would allow it to sell debt through TALF and be labeled a prime issuer.

The credit card portfolio of BofA comprises of just 68% of the accounts with FICO score >660. Anything below 70% brands the issuer subprime, and investors who buy such debt can demand extra protection against the possibility of default. FICO scores are consumer-credit ratings compiled by Fair Isaac Corp.

Banks that don’t sell asset-backed bonds can find cash from other sources such as customer deposits to make new loans and pay down expiring debt. As cheap financing dwindles, credit-card profits may be squeezed

Bank of America’s default rates are moving in the opposite direction from competitors, in addition much higher than the industry average. In July, the U.S. credit card industry average fell to 10.52%, marking the first monthly decline since September. The only major card lender with a higher rate than Bank of America is Advanta Corp., which said it may not survive after cutting off almost 1 million small- business accounts. Advanta is unwinding its credit-card trust after defaults surged to more than 20%.

The top six U.S. credit card-backed bond issuers have a combined $375.1 billion in outstanding securitizations. Bank of America has the most securitized debt, at $93.9 billion, followed by JPMorgan, Citigroup, Capital One Financial Corp., Discover Financial Services and Amex, according to Morgan Stanley.

While Bank of America stands out as the sole major issuer that hasn’t sold card debt this year, such sales are falling. They plunged 38% last year to $58 billion as the credit crunch sapped demand, according to data compiled by Bloomberg. There were no bond sales this year until March, when the Fed started TALF. The Fed last week extended TALF for three more months.

Some banks may be issuing less asset-backed debt as they prepare for accounting changes mandated by the U.S. Financial Accounting Standards Board to take effect next year. The rules will require banks to carry all securitized loans on their balance sheets, threatening the capital relief that had been one of the “hallmark benefits” of selling the debt.

Bank of America, JPMorgan, Citigroup, Amex and Discover have taken steps to stanch losses and thwart ratings cuts on card-backed bonds. Remedies include removing weaker accounts and boosting the cash cushion that protects investors from losses by issuing new classes of securities and keeping them on balance sheet.