The Impact Of Failing Retailers On ABS Credit Card Trusts

Primary Credit Analyst: Kenneth D Martens, New York (1) 212-438-7327; kenneth.martens@standardandpoors.com Secondary Contacts: Frank J Trick, New York (1) 212-438-1108; frank.trick@standardandpoors.com Ildiko Szilank, New York (1) 212-438-2614; ildiko.szilank@standardandpoors.com

NEW YORK (Standard & Poor's) Aug. 9, 2013--Over the past few months, there have been several news reports regarding the future financial stability of various retailers. This could have an impact on the credit card securitization trusts that contain receivables generated by co-branded or private-label cards (collectively referred to as "retail cards") associated with these retailers. Standard & Poor's Ratings Services has stated that despite its expectation of a continued modest rebound in the U.S. economy, some retail segments, including niche non-apparel, restaurants, and certain mid-tier department stores, still face greater challenges than others in their ability to draw in the consumer (see "Momentum Is Limited For U.S. Retail Sales Despite Domestic Economic Recovery," July 15, 2013). When rating and monitoring credit card asset-backed securities (ABS), we consider the future viability of a retailer because we believe that the closing of retailer's stores can reduce or eliminate the utility of the related credit cards. This would likely have an adverse impact on the size and performance of related trust assets. The unique risks associated with a retail card securitization affect assumptions for certain key performance variables (e.g., purchase rates, payment rates, and loss rates). We consider the rating of the card originator, the type of card, and the diversification of the securitized portfolio in our purchase rate assumptions. Generally, we consider lower purchase rate credit for private-label card programs tied to a specific retailer, as we believe these cards will likely have less utility than co-branded cards, which can be used as general-purpose cards even in the event of the closing of the related retailer's store (see "Revised Purchase And Payment Rate Assumptions For U.S.

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The Impact Of Failing Retailers On ABS Credit Card Trusts

Credit Card ABS," Sept. 14, 2011). When determining loss and payment rates (key components of our analysis) for trusts with diversified pools of retail cards, the focus is on what securitization performance would look like if certain retail card relationships were removed from the collateral pool. In a well-diversified pool where performance is generally the same for all retailers, this would not result in a material change in performance under our simulations. But for a pool that has a large exposure to one retailer with a high payment rate, we would assume a lower payment rate when that retailer is removed under our simulations. As a result, even if the trust payment rate performance was the same for the two pools, the well-diversified pool would benefit and would generally have a higher payment rate assumption. Certain retailers are affiliated with banks established to issue retail cards associated with the retailer. Typically, these pools are not diversified. In our opinion, if the retail store closes and the cards lose their utility, the strongest underlying obligors will likely pay off their outstanding receivables balances quickly, and the pool would then be left with the least creditworthy obligors. This outcome is more likely to occur for a retailer-affiliated bank, considering that one of the primary reasons retailers set up card programs is to help increase sales. Therefore, following a retailer's closure, with sales generation no longer applicable, the retail affiliated bank is most likely to cease issuing credit and possibly sell the outstanding receivables. We incorporate all of these risk factors into our forward-looking view when rating and monitoring credit card ABS, and when determining our base-case and stressed cash flow assumptions (see "General Methodology And Assumptions For Rating U.S. ABS Credit Card Securitizations," April 19, 2010). In addition, we look at the composition of the assets, incorporating factors such as the merchant and industry diversification of the retail cards, seasoning of the accounts, credit and account balances, geographic diversification, and FICO scores into our evaluation. Finally, we consider the structural mitigants that exist, such as trust asset test amortization triggers and account addition and removal requirements. Because we contemplate all of these factors in arriving at our credit card ABS ratings, a change in the rating of a retailer--or a retailer's bankruptcy or closure--in and of itself often will not lead to a rating change. RELATED CRITERIA General Methodology And Assumptions For Rating U.S. ABS Credit Card Securitizations, April 19, 2010 Revised Purchase And Payment Rate Assumptions For U.S. Credit Card ABS, Sept. 14, 2011 RELATED RESEARCH July Retail Update: Momentum Is Limited For U.S. Retail Sales Despite Domestic Economic Recovery, July 15, 2013 Industry Report Card: Performance Will Remain Uneven For The U.S. Retail

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Sector In 2013 As Consumers Remain Cautious, May 14, 2013

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