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Chase, Discover Tiptoe Back Into Market
Asset Backed Alert, Harrison Scott Publications Inc. (September 21, 2007)

Chase Manhattan and Discover are quietly gauging investor demand for big credit-card securitizations that they could bring to market in the coming weeks.

Each transaction is expected to tip the scales at slightly more than $1 billion. Affiliate J.P. Morgan Chase is handling underwriting duties for the Chase deal, while Morgan Stanley is working on behalf of Discover, which it spun off in June.

Talks with possible buyers of the bonds began last week, in what industry players are billing as preliminary marketing efforts. Such behind-the-scenes discussions, known as "pre-marketing" campaigns, have gained popularity among issuers and underwriters lately as they try to deal with supply-and-demand technicals that have fallen out of whack.

It's unclear when the official marketing campaigns will begin. Investors say J.P. Morgan and Morgan Stanley have made it clear that they won't proceed if pricing levels prove unfavorable. "They're trying to see where spreads might wind up if they try to sell these deals. They haven't even gotten around to marketing business yet," said one buysider who added that he received calls from both banks last week.

Determining the values of asset-backed bonds in general has been a crapshoot in recent months, as spreads bounce around amid the ongoing credit-market crunch. However, Chase and Discover may have received a strong indication of their funding costs last week, when Citigroup placed a $1.8 billion credit-card securitization. That deal, consisting of a single tranche of 10-year fixed-rate securities with triple-A ratings, went out for 58 bp over swaps, which was 2 bp tighter than initially expected.

A week before, Citi also sold a batch of five-year floaters at 35 bp over Libor. The bank, like Chase and Discover, is considered a bellwether issuer.

Moving down a tier, 1st Financial Bank of Abilene, S.D., unloaded $93 million of 3.4-year card bonds this week at 75 bp over Libor. UBS led the Rule-144A offering, which earned triple-A ratings thanks to a wrap from FSA.

Before credit fears pushed investors out of the structured-finance market en masse a few months ago, many card-backed issues were pricing right around their benchmarks, and in some cases under them. That said, performance among the deals' underlying accounts has been solid, prompting one investment-bank analyst to call the current pricing levels unjustified.

Chase and Discover, for their parts, are said to be hoping for tighter spreads than those garnered by Citi.

It's possible that the banks will get their wish, given signs that this week's cut in the Fed funds rate will nudge investors back into the market (see article on Page 2). But there's also reason to believe that spreads won't move in much, and that funding costs could actually rise if the banks hold out much longer.

Despite their statements to investors that they won't float their deals under such a scenario, some believe Chase and Discover might eventually proceed with the offerings anyway. The reason: Neither has completed a securitization since July, meaning they both probably need funding for their card businesses.

Both companies typically issue on a more-frequent basis, with Chase by itself accounting for 18 credit-card securitizations since January. Those deals, totaling $12.6 billion, made the lender the world's second most active producer of such bonds over the first eight months of this year. It might have been first, if not for its recent timeout.

Only Bank of America had more, at $13 billion.
If there's one bright spot for card-bond issuers, it's that strong performance within their collateral pools has kept investors somewhat interested in the asset class even as they completely abandon mortgage-related sectors - where spreads have widened even more and new-deal activity has all but shut off. That helped card lenders place $61.5 billion of new asset-backed securities over the first eight months of this year, an increase of nearly 20% from the year-earlier tally of $52.2 billion, according to Asset-Backed Alert's ABS Database.

In fact, credit-card securitization volume for all of 2007 remains on pace to top the all-time high of $75.4 billion set in 2001. The growth is being fed, in part, by a need to refund about $59 billion of bonds that are coming due this year. Production from non-U.S. sources has fallen to $1 billion, from $4.8 billion a year ago.



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