Revolving Credit Card Receivables Securitization
Unlike closed-end installment loans, revolving credit receivables involve greater uncertainty about future cash flows. Therefore, ABS structures using this type of collateral must be more complex to afford investors more comfort in predicting their repayment. Accounts included in the securitization pool may have balances that grow or decline over the life of the ABS.
Accordingly, at maturity of the ABS, any remaining balances revert to the originator. During the term of the ABS, the originator may be required to sell additional accounts to the pool to maintain a minimum dollar amount of collateral if accountholders pay down their balances in advance of predetermined rates.
Credit card securitizations are the most prevalent form of revolving-credit ABS, although home equity lines of credit are a growing source of ABS collateral. Credit card ABS are typically structured to incorporate two phases in the life cycle of the collateral: an initial phase during which the principal amount of the securities remains constant, and an amortization phase during which investors are paid off. A specific period of time is assigned to each phase. Typically, a specific pool of accounts is identified in the securitization documents, and these specifications may include not only the initial pool of loans but a portfolio from which new accounts may be contributed.
The dominant vehicle for issuing securities backed by credit cards is a master trust structure with a ‘‘spread account,’’ which is funded up to a predetermined amount through ‘‘excess yield’’—that is, interest and fee income less credit losses, servicing, and other fees. With credit card receivables, the income from the pool of loans—even after credit losses—is generally much higher than the return paid to investors. After the spread account accumulates to its predetermined level, the excess yield reverts to the issuer. Under GAAP, issuers are required to recognize on their balance sheet an excess-yield asset that is based on the fair value of the expected future excess yield; in principle, this value would be based on the net present value of the expected earnings stream from the transaction. Issuers are further required to revalue the asset periodically to take account of changes in fair value that may occur due to interest rates, actual credit losses, and other factors relevant to the future stream of excess yield.
Reference: Federal Reserve Board