Home Finance GuideHigh Finance Credit Card Receivables ABS

Credit Card Receivables ABS

By: EconomyWatch Content Date: 29 January 2010

About The Author

Follow The Money

Credit card receivables ABS is a primary source of funding unsecured revolving consumer credit. The certificates or bonds issued in this case are backed by credit card receivables of the originating institution. This ABS category is generally issued to institutional investors, due to the various transaction complexities. In vogue since 1987, issuance of credit card receivables ABS is popular among banks and institutions providing credit card services.

Issuance of Credit Card Receivables ABS

The process of issuing credit card receivables ABS is similar to that of other types of ABS. The originating institution sells its receivables to a trust which in turn creates and sells certificates backed by the receivables to institutional investors. Most credit card companies, however, set up a master trust to carry out multiple issues of securities backed by credit card receivables.

In a credit card securitization transaction, only the receivables are sold to a trust while the account generating the receivables are continued to be held by the originating institution. Fresh transactions by credit card holders result in new receivables which are purchased by the trust, using the monthly principal payments received and deposited in a separate account.

Credit Card Receivables ABS vs. Other Types of ABS

Credit card securitizations differ from other ABS types in that underlying credit card receivables have a relatively short life of eight to ten months. The certificates, however, are issued for longer terms and have maturities of three, five or ten years. To balance this mismatch, the series issued from a master trust is structured to have a revolving period and a controlled amortization period.

During the pre-decided revolving period, the cardholders’ monthly principal and interest payments are deposited into two separate collection accounts: one for principal and the other for finance charges. While the trust expenses and interest payments on investor certificates are paid from the finance charge account, the funds from the principal account are used to purchase new receivables from the originating institution. During the controlled amortization period, the principal collections are used to repay the outstanding principal amount of the investor certificates.