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Market for Credit-Card Backed Securities Comes Back To Life

March 1, 1992

NEW YORK (AP) _ Credit-card holders may not notice, but the market that indirectly lends them their plastic-card money has crawled back to life.

Ending a four-month absence by most major players, Chase Manhattan Corp. last week sold $750 million of the securities to investors hungry for something to buy.

The eagerly bought issue provided one of the most definitive signs to date that the market for credit-card backed securitites has returned from its depths of last fall.

The infant market grew from nothing in 1985 to a robust $23 billion in 1990. Banks and other issuers of credit cards jumped at the chance to sell their customers’ IOUs to investors, using the proceeds to pay everything from new credit-card loans to interest on CD accounts.

In return, investors profited by receiving a chunk of the monthly payments that customers sent to their card issuers.

But the market had the wind kicked out of it in November when the Senate proposed a cap on credit card interest rates at 14 percent.

The measure seemed good for consumers, who typically pay rates of more than 18 percent on their credit-card purchases, but it prompted panic selling in the credit-card securities market.

Banks, in their agreements to pay a certain yield and principal on the securities, assume they will earn a certain interest rate on credit-card purchases.

So when members of Congress talked about measures that would cut that expected interest rate, investors got scared that lower rates would trigger clauses in bond agreements forcing issuers to pay off the bonds before they matured.

Investors don’t like to get paid their principal early in today’s low- interest climate because it forces them to reinvest their money at lower rates.

The proposal forced secondary sellers to boost yields by up to 50 basis points over previous spread levels. The spread is the amount by which the yield eclipses yields of Treasury bonds, which are considered the lowest-risk securities. A basis point is one-hundredth of a percentage point.

The proposed credit card cap died in Congress, but shivers continued through the credit-card securities market for months to come, with yields hovering 10 to 15 basis points above previous levels. Only $20 billion of new securities were sold in 1991, the first annual decline in the market’s short life.

Chase’s successful sale, though, seems to have put those fears to rest. Before Chase, the only other major issue since the scare was a $650 million sale by Household Finance in December.

Chase sold five-year securities yielding 7.48 percent. That was about 78 basis points above what the U.S. Treasury’s five-year note was paying, bringing the spread back to levels before the scare.

If Chase had sold the securities during November’s dark days, it would have had to pay closer to a full percentage point above the five-year Treasury note’s yield, said Patricia Bonan, managing director of Chase Securities Inc., a subsidiary of Chase Manhattan Corp.

She said there was strong demand for the Chase issue due to the drought of other new securities since the November scare.

The proceeds will be used to pay bank expenses such as interest on CD accounts.

″It was a great issue, tremendous investor demand, partly due to lack of supply,″ Bonan said.

Chase’s issue could mark the end of the drought. Market participants say they expect other issuers to get back into the game this year, partly because they have to. Many of the securities that were issued when the market was born are now coming due, and issuers will want to sell new securities to pay for the maturing principals on the outstanding bonds.

″Barring any goofy legislative events, the players will come back, not necessarily to securitize new issues, but to securitize payoffs,″ said one Midwest trader in credit-card securities.

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