FDIC safe harbor uncertainty may impact credit card ratings

Uncertainty over whether the FDIC will continue to grant "safe harbor" status to the securitizations of banks in receivership, as new accounting rules go into effect, may spur negative rating actions on top-rated credit card securities, Moody's warned in a report.

The American Securitization Forum, a leading financial industry group, submitted a proposal to the FDIC in late September, on behalf of market participants to address those concerns as new accounting rules get set to go into effect.

"There are a variety of possible outcomes, ranging from full protection from repudiation and stay risk to no protection at all," said William Black, a senior vice president at Moody's Investors Service.

"In the worst case, absent further clarification from the FDIC, we believe that some credit card ABS will be exposed to repudiation and stay risk," Black said.

According to the Moody's report, "these incremental risks amplify the linkage between the ratings of the sponsor bank and the related credit card ABS and, assuming they remain unmitigated, there will likely be rating downgrades on some credit card ABS."

The credit strength of the sponsor will be among the factors that determine the magnitude of any downgrade.

"Generally, the weaker the credit strength of the sponsor, the more likely that these incremental credit risks will materialize, and the greater the magnitude any rating action to senior ABS -- virtually all of which are currently rated Aaa," said Black.

Credit card securitizations that are structured as legal true sales may be less at risk of repudiation and stay despite the loss of the safe harbor. "Even so," said Black, "a multi-step true sale transfer does not allay all our concerns."

Moody's said it will continue to assess new transactions, and to the extent they are sponsored by banks rated at least Aa3, may assign Aaa ratings.

"Despite the uncertainty surrounding the future actions of the FDIC, the likelihood of a downgrade to ABS sponsored by Aa3 or above rated banks is low, and should it occur, the degree of rating transition will be very limited," said Black.

If the safe harbor issue remains unresolved, Moody's will likely place under review for downgrade those outstanding Aaa-rated credit card transactions that are not sponsored by banks rated at least Aa3.

The timing of any review would coincide with the effective implementation date of the new accounting rules, with fiscal years beginning after November 15, 2009, the rating agency said.