Presale:
Swiss Credit Card Issuance 2016-1 AG
Primary Credit Analyst:
Ignacio T Estruga, Madrid (34) 91-389-6964; [email protected]
Secondary Contact:
Miguel Barata, London (44) 20-7176-7132; [email protected]
Table Of Contents
Transaction Summary
Rating Rationale
Strengths, Concerns, And Mitigating Factors
Transaction Structure
Seller
Legal Risk
Credit And Liquidity
Counterparty Risk
Set-Off Risk
Commingling Risk
Scenario Analysis
Transaction Analysis
Monitoring And Surveillance
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Table Of Contents (cont.)
Related Criteria And Research
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Swiss Credit Card Issuance 2016-1 AG
This presale report is based on information as of May 18, 2016. The ratings shown are preliminary. This report does not constitute a
recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the
preliminary ratings.
Preliminary Ratings As Of May 18, 2016
Class
Prelim.
rating*
Prelim. amount
(mil. CHF)
Available subordination
(%)
Interest
Scheduled
maturity
Legal final
maturity
A
AAA (sf)
TBD
5.00
TBD
June 2019
June 2021
B
A+ (sf)
TBD
2.00
TBD
June 2019
June 2021
C
BBB+ (sf)
TBD
0.00
TBD
June 2019
June 2021
*Our rating on each class of securities is preliminary as of May 18, 2016, and subject to change at any time. We expect to assign final credit
ratings on the closing date, subject to a satisfactory review of the transaction documents and legal opinion. Our ratings address timely payment of
interest and ultimate repayment of principal. TBD--To be determined.
Transaction Participants
Arranger
Joint lead managers
Lloyds Bank PLC
Credit Suisse AG, Zuercher Kantonalbank, and Lloyds Bank PLC
Originator
Swisscard AECS GmbH
Selling originator
Swisscard AECS GmbH
Servicer
Credit Suisse AG
Collateral trustee, note trustee, and security trustee
Wells Fargo Trust Corporation Ltd.
Asset SPE account bank
Credit Suisse AG
Issuer account bank
Zuercher Kantonalbank
Corporate services provider
Swisscard AECS GmbH
Cash manager
Swisscard AECS GmbH
Paying agent
Credit Suisse AG
Supporting Ratings
Institution/role
Ratings
Credit Suisse AG as asset SPE account bank and servicer*
A/Stable/A-1
Zuercher Kantonalbank as issuer account bank
AAA/Negative/A-1+
*Certain cardholder notification triggers are linked to our ratings on Credit Suisse in its capacity as account bank and servicer (see "Commingling
Risk").
Securitized Portfolio Key Features
Expected closing date
Collateral
June 2016
Swiss Visa, MasterCard, and American Express credit card receivables originated by
Swisscard AECS GmbH
Aggregate receivables (principal and finance charge
receivables) (CHF)*
875,474,429
Average credit limit per account (CHF)*(i)
6,529.8
Average balance per account (CHF)*
1,747.6
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Securitized Portfolio Key Features (cont.)
Average seasoning (years)*
7.9
Accounts delinquent for 30 or more days (%)*
2.79
Country of origination*
Concentration (by accounts)*
Switzerland
Switzerland-German (74.35%), Switzerland-French (20.49%), and Switzerland-Italian
(4.08%)
*As of March 2016, excluding zero balance and credit balance accounts. (i)The average credit limit is calculated using the midpoint of the
reported ranges and then multiplied by the percentage of accounts in that range.
Transaction Summary
S&P Global Ratings has assigned preliminary credit ratings to Swiss Credit Card Issuance 2016-1 AG's class A, B, and
C notes.
The collateral backing the notes comprises Swiss Visa, MasterCard, and American Express credit card receivables
originated by Swisscard AECS GmbH--a joint venture between Credit Suisse AG and American Express.
Swiss Credit Card Issuance 2016-1 will be the fifth issuance to issue notes backed by the collateral pool.
Credit Suisse is the asset special-purpose entity (SPE) account bank provider and Zuercher Kantonalbank is the issuer
account bank provider. Currently, Credit Suisse is the servicer of the receivables; however, it has delegated all
servicing duties to Swisscard.
In July 2015, the credit card accounts were transferred to Swisscard from Credit Suisse. Since then, Swisscard has
been the originator and legal issuer of the credit cards. When we rated the 2015-1 issuance, we considered (based on
our current criteria) that this business transfer did not, in and of itself, adversely affect our ratings on the issuances
from the program. Since then, Swisscard has been the only originator of the securitized accounts.
The class A and B notes will benefit from hard credit enhancement in the form of subordination of the lower rated
classes of notes. An excess spread trapping mechanism will provide credit enhancement for the class C notes.
There is no currency mismatch between the assets and the notes as both are denominated in Swiss francs. We have
considered any potential interest mismatch between the floating-rate assets and fixed-rate notes in our analysis.
Rating Rationale
Sector outlook
In our base-case scenario, we forecast that the Swiss economy will record GDP growth of 1.1% in 2016 and 1.7% in
2017, compared with 0.9% in 2015. At the same time, we expect the unemployment rate to slightly deteriorate to 3.6%
in 2016, and 3.7% in 2017, from 3.3% in 2015. We expect consumer price inflation to increase to -0.7% in 2016 and
0.5% in 2017, from -1.1% in 2015 (see "Europe Is Still Holding On, Amid Negative Rates And Brexit Risk," published on
April 6, 2016, and "European Economic Snapshots," published on April 12, 2016). In our view, changes in GDP growth
and the unemployment rate are key determinants of portfolio performance. Based on our forecast for economic growth
and unemployment, we expect Swiss credit card performance will generally remain stable over the next 12 to 24
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months, though the reduction of the credit cards' interest rate to 12% + three-month Swiss LIBOR from 15% could
reduce the yield rates.
Operational risk
In March 2016, we conducted a corporate overview of Swisscard's origination, underwriting, account administration,
collections, and risk management practices. We consider these to be in line with general market practice and our
criteria for assessing operational risk (see "Global Framework For Assessing Operational Risk In Structured Finance
Transactions," published on Oct. 9, 2014). The application of our operational risk criteria does not constrain the
maximum potential ratings on the notes below 'AAA' given our low portability and low severity risk assessment.
Credit risk
In our analysis, we have considered the portfolio's historical payment, purchase, and charge-off rates, as well as yield,
and we have set our base-case assumptions in line with our European consumer finance criteria, taking into account
macroeconomic conditions and industry trends (see "European Consumer Finance Criteria," published on March 10,
2000).
The pool is revolving and our base-case assumptions consider that the pool's composition could shift before
amortization (which is the only period we consider in our cash flow analysis). For example, the share of revolvers in
the pool could increase over the credit cycle, which could lead to lower payment rates and higher charge-offs.
Based on observed trends to date, our base-case charge-off and yield assumptions remain unchanged since when we
rated the 2015-1 and 2015-2 issuances (see "New Issue: Swiss Credit Card Issuance 2015-1 AG" and "New Issue: Swiss
Credit Card Issuance 2015-2 AG," both published on June 15, 2015). We have slightly increased our payment rate
assumption.
Cash flow and structural risk
We ran two cash flow scenarios: early amortization under both rising and falling interest rates. The class A notes pass
at the 'AAA' level, the class B notes at the 'A+' level, and the class C notes at the 'BBB+' level. We have also tested the
ratings' sensitivity to a lifetime of negative interest rates on collections given that there is only a limited floor on the
interest payable on deposits in the various account banks. This has no impact on the ratings.
A 11.1% minimum seller share can absorb losses from dilutions and fraud, as well as any residual set-off risk (if any), in
our opinion. Early amortization triggers accelerate payments to noteholders if the trust pool's performance deteriorates
significantly.
Counterparty risk
Counterparty risk comes from Credit Suisse as the asset SPE account bank and servicer of the collections account and
from Zuercher Kantonalbank as the issuer account bank. Our current ratings on the account bank and the replacement
language in the agreements are in line with our current counterparty criteria (see "Counterparty Risk Framework
Methodology And Assumptions," published on June 25, 2013). We consider the presence of commingling risk to be
mitigated under the current transaction structure through the borrower notification trigger if we lower our long-term
issuer credit rating on Credit Suisse below 'BBB'.
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Legal risk
We consider the issuer to be a bankruptcy remote entity, in line with our European legal criteria (see "Europe Asset
Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013). We have received
legal comfort that the sale of the receivables would survive the insolvency of Swisscard as the selling originator.
Credit stability
We have analyzed the effect of a moderate stress on the credit variables, and the ultimate effect on our ratings on the
notes (see "Scenario Analysis: Charge-Off And Payment Rate Movement May Determine Downgrades In European
Credit Card Sector," published on May 12, 2009). The sensitivity scenarios we tested involve both rising and falling
interest rates for the series 2016-1 notes. The resulting rating transitions are in line with our credit stability criteria (see
"Methodology: Credit Stability Criteria," published on May 3, 2010).
Our preliminary ratings on the series 2016-1 notes reflect our assessment of the collateral pool's credit and cash flow
characteristics, as well as our analysis of the transaction's legal, counterparty, and operational risks. Our analysis
indicates that the credit enhancement available to the series 2016-1 class A, B, and C notes would be sufficient to
mitigate the cash flow losses that could be present in scenarios that are commensurate with the preliminary rating
levels that we have assigned according to our European consumer finance criteria.
Strengths, Concerns, And Mitigating Factors
Strengths
• We consider the assets to be of very good quality, with losses that are low compared with those exhibited by U.K.
credit card master trusts.
• There is a comparatively high proportion of convenience users who fully pay off their monthly balance (transactors)
in the securitized portfolio, which results in a high payment rate.
• Swisscard is the market leader in Switzerland by issuance volume, and benefits from American Express' credit card
management expertise and Credit Suisse's distribution channels.
Concerns and mitigating factors
• The revolving period could change the pool characteristics, thus potentially undermining the pool's overall credit
quality. Any substitution of further assets will be subject to eligibility criteria in the transaction documents, and
additions above a certain volume are subject to our rating agency confirmation (RAC). There are triggers to end the
revolving period--such as if the portfolio yield falls below the note expenses--which will limit the extent of the asset
quality migration.
• Swiss law does not allow for the assignment and transfer of receivables that do not yet exist. This would lead to a
reduced purchase rate or yield if the originator becomes insolvent, as no new principal receivables, and a limited
amount of finance charge receivables, could be assigned to the asset special-purpose entity (SPE). We have sized
conservative base-case assumptions in our analysis to verify the structure's ability to pay timely interest and
guarantee ultimate repayment of principal at the relevant rating levels.
• The Swiss government will imposed a reduction to the usury rate charge to a credit card account to a flexible
maximum of 12% plus three-month Swiss Franc LIBOR from 15.0%. Under the current low Swiss LIBOR
environment, this could reduce the finance charge generated on the assets. In the long term, we expect that overall
pricing would be adjusted to recover some of the potentially lost revenue.
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Transaction Structure
At closing, Swiss Credit Card Issuance 2016-1 will issue the series 2016-1 notes comprising class A, B, and C Swiss
Franc-denominated notes. The issuer will use the issuance proceeds to acquire a secured limited-recourse note,
entitling the issuer to a share of the proceeds from receivables held by the Swiss-based asset SPE (Swiss Payments
Assets Ltd. or asset SPE) along with any investment proceeds on the amounts held in its accounts. The asset SPE will
use the issuance proceeds to acquire receivables from the originator. The structure allows for the issuance of further
series of notes. The asset SPE can acquire further accounts during the revolving period from any originator designated
as the selling originator. Swisscard is currently the only selling originator following the business transfer mentioned in
June 2015. Swisscard has assumed all the responsibilities and obligations of Credit Suisse under the credit agreements
and the securitization program in its role as selling originator. At that time, we considered that under our current
criteria, the transfer of ownership did not, in and of itself, adversely affect our ratings on the notes.
For the purchase of receivables arising under the designated accounts, the asset SPE will pay to the originator a
purchase price equal to the principal purchase price and the initial and deferred finance charge purchase price. The
principal purchase price will equal 98.5% of the principal receivables balance outstanding at closing (see "Foreign
exchange fee mechanism"). The initial finance charge purchase price is payment for the acquired finance charge
receivables and is payable senior in the payment priority, while the deferred finance charge purchase price is junior
(see "Early amortization").
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Cash flow allocations
Each series issued from the program will be backed by an additional issuer certificate. All such series forming part of
the same sharing group will rank pari passu with each other. Any additional series outside the existing sharing group
can carry a different rank to the existing group's series and different associated cash flow allocations. Under the
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transaction documents, the issuance of further series of notes is subject to our RAC that there will be no negative
impact on our then-current ratings on the outstanding classes of notes.
Receivables generated under the accounts designated to the asset SPE will be divided into finance charge and principal
receivables, and will follow two separate allocations.
Finance charge allocation
Finance charge receivables include annual card fees, interest on the revolving balance, late payment fees, proceeds
from discounting principal collections, recoveries on defaulted accounts, and acquired insurance commission.
Interchange does not form part of the finance charge receivables.
The asset SPE cash manager will first subtract from the aggregate finance charge collections its own costs and
expenses, the servicing fee, a profit amount, and finally the initial purchase price paid for finance charge receivables.
The remaining amounts will be allocated across the issuer certificates in proportion to the nominal liquidation amount
of the notes backed by each certificate. Broadly, the nominal liquidation amount of a class of notes is its initial balance
outstanding, less principal already allocated or paid to such notes, and less unreimbursed charge-offs. Any excess of
finance charge collections over the amounts allocable to the issuer certificates will be swept out to the originator
certificates.
The amounts allocated to all issuer certificates within a sharing group will initially be pooled together and then
distributed across each certificate on the basis of the certificate's need. The need is defined as an amount required to
pay senior costs and make interest payments on the notes backed by a certificate, and cure any charge-offs allocated
to it. If the finance charges allocated to the existing sharing group are insufficient to make all payments under the
sharing group issuer certificates, each issuer certificate and the corresponding series will suffer the same shortfall as a
proportion of its need.
This is the premise of a socialized structure; the issuance of further series of notes in the future backed by issuer
certificates within the same sharing group could have an adverse impact on the cash flows received by the existing
series.
During an early amortization period, finance charges allocated to the same sharing group's issuer certificates will be
made on a fixed basis, i.e., in proportion to the nominal liquidation amount of the notes at the beginning of the
amortization period. This is more beneficial to the notes, compared with the floating allocation in the U.K. credit card
master trusts, for example.
Subject to certain conditions, the asset SPE can cure any shortfalls under the issuer certificates using principal
borrowed from the principal priority of payments. Principal borrowings will reduce the nominal liquidation amount of
the notes, i.e., the amount of principal collections to which the notes are entitled. Principal can only be borrowed to
pay interest on the class C notes and more senior items, until the class C nominal liquidation amount has reduced to
zero; the same goes for the class B notes. Under no circumstances can the asset SPE borrow principal if that would
lead to a reduced nominal liquidation amount for the class A notes.
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Principal allocation
Similar to finance charges, principal collections are transferred to the asset SPE's account within two days of being
processed by the originator. Initially, principal collections on all ineligible receivables are transferred to the originator.
There are three distinct periods that govern the principal cash flows. These are the revolving period, the controlled
accumulation period, and the early amortization period.
During the revolving period, Swiss Credit Card Issuance 2016-1 will first retain an amount equal to the total nominal
liquidation amounts of the class B and C notes, for potential use in the finance charge waterfall via the principal
borrowing mechanism. It will use any unused amount plus the amounts in excess of required retained principal to
purchase further principal receivables.
Provided no early amortization event has occurred, the controlled accumulation period for any series of notes will
commence three months before their scheduled redemption date. During the controlled accumulation period, the asset
SPE will deposit into the principal funding account an amount equal to the lower of the nominal liquidation amount
and the controlled accumulation amount for each of the notes in the series, for soft-bullet redemption of the
corresponding notes on the scheduled maturity date.
If an early amortization event were to occur, Swiss Credit Card Issuance 2016-1 would use the amounts in the
principal funding account to redeem the notes sequentially, starting with the class A notes, followed by each remaining
class of notes in order of seniority, provided each of the more senior classes of notes have been redeemed in full.
Early amortization will occur if any of the following triggers are breached:
•
•
•
•
•
•
•
•
•
The asset SPE, the issuer, a selling originator, or the servicer becomes insolvent;
The three-month rolling average excess spread becomes negative;
The originator's interest over any 30-day period is less than the minimum required amount;
The amount of eligible receivables becomes lower than the nominal liquidation amount of all the notes backed by
the issuer certificates;
Any class of notes is not redeemed in full on its scheduled redemption date;
A selling originator is unable to transfer receivables to the asset SPE;
A selling originator ceases to be resident for tax purposes in Switzerland;
The law changes, causing the asset SPE to become liable for tax, and this has a negative impact on our then-current
ratings on the outstanding classes of notes; and
The selling originator(s) or servicer fails to perform any of their duties as specified by the transaction documents.
Failure to remedy this during the grace period following notification results in an event of default.
During the revolving period and the controlled accumulation period, the notes will pay fixed interest rates annually.
The asset SPE will accumulate each month an amount equal to 1/12 of the annual coupon for each class of notes.
Once an early amortization trigger is hit, the amounts accumulated in the issuer distribution account's interest ledger
will be applied to the respective classes of notes on the next monthly distribution date. From that point onward,
interest and principal payments will switch to monthly.
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Charge-off allocation
Charge-offs are allocated on a floating-share basis. Each month, the portion of the aggregate charge-off amount
allocated to each issuer certificate will be proportional to the nominal liquidation amount of the notes backed by such
issuer certificate--as a fraction of the eligible receivables in the asset SPE or the sum of nominal liquidation amounts of
all the issuer certificates, whichever is greater.
Minimum originator's interest
The originator's interest serves to protect the noteholders against originator-related risks such as fraud, dilutions, and
any residual set-off risks. Any ineligible receivables--such as returns, receivables from fraudulent transactions, and
receivables that have been set off against by the cardholders--would serve to reduce the originator's interest.
The minimum originator interest consists of a fixed and a variable portion. The fixed portion of minimum originator
interest is 7.7%. Under our analysis, this level is sufficient to fully mitigate the risk of sharp rises in dilutions and fraud
at the 'AAA' rating level. The variable portion of the minimum originator interest will initially be set at 3.4%. .
If the originator interest drops below the minimum required level, the notes will start to amortize early, further limiting
the risk to investors.
Early amortization
In the pre-enforcement amortization period payment priority, finance charge collections allocable to each issuer
certificate would be applied (see table 1).
Table 1
Pre-Enforcement Early Amortization Period Finance Charge Payment Priority
1
Pay senior costs of the issuer up to a cap.
2
Pay monthly interest on the class A notes.
3
Pay monthly interest on the class B notes.
4
Pay monthly interest on the class C notes.
5
Cure monthly charge-offs by redirecting part of finance charge collections to the principal priority of
payments.
6
Cure any past charge-offs and principal borrowings by redirecting finance charge collections to the
principal priority of payments.
7
Top up the accumulation reserve to its required amount.
8
Top up the liquidity reserve up to its required amount.
9
Top up the spread account to its required amount.
10
Pay any remaining senior costs, above the cap in the first item of this priority of payments.
11
If the originator's interest is below the minimum required amount, apply an amount equal to the
shortfall in the principal priority of payments.
12
Re-divert to the principal waterfall to amortize the notes (turbo amortization).
13
Retain issuer profit.
14
Pay any residual funds to the asset SPE.
Similarly, before an enforcement event, during an early amortization period, principal collections will be applied (see
table 2).
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Table 2
Pre-Enforcement Early Amortization Period Principal Payment Priority
1
Pay principal on the class A notes until they are redeemed in full.
2
Pay principal on the class B notes until they are redeemed in full.
3
Pay principal on the class C notes until they are redeemed in full.
In an event of default, the payment priority would switch to a combined interest and principal one. The events of
default relate to issuer insolvency as well as a failure by the issuer/asset SPE to perform a duty specified by the
transaction documents. In our opinion, these events are not likely to occur and will therefore have no ratings effect.
Spread capture for the class C notes
A spread capture mechanism protects the class C notes from losses. The mechanism would trap cash--if the average of
three months' excess spread fell below 4.5%--into an account held with a bank that we rate at least 'A' with a
short-term rating of 'A-1', or 'A+' otherwise. The amount of the spread captured would step up if excess spread fell
further below this percentage.
Foreign exchange fee mechanism
Under the transaction structure, principal receivables will be purchased at a discount equal to 1.5%. Subsequently, a
portion of the principal collections equal to 1.5% will be redesignated as finance charges and applied in the finance
charge payment priority. The remaining 98.5% will be applied in the principal payment priority.
The purpose of the mechanism is to account for conversion fees (the fees related to cardholders using their cards
abroad). Currently, the originator's system considers those fees to be principal receivables.
The discounting mechanism may be abandoned in the future, once the originator's system recognizes those
receivables as finance charges, but this will be subject to our rating confirmation.
Seller
Swisscard--a joint venture between Credit Suisse and American Express--was founded in 1998. It is the leading credit
card issuer in Switzerland by market share, with more than 30% of Swiss retail credit card business.
Swisscard is the owner of the originated receivables, provider of issuing services, and is responsible for product
development, marketing, sales, customer service, and card processing.
Swisscard offers credit cards under a range of brands: American Express, Credit Suisse, CoOp, Swiss International Air
Lines, and MasterCard. Marketing occurs via the Credit Suisse channel, Swisscard's website, "take one" programs, and
target mail.
Swisscard is responsible for risk management, which involves product planning and new account management,
account maintenance, collections, and systems monitoring and improvement. Underwriting policies include age limits,
minimum income levels, presence of a banking relationship in Switzerland, and lack of negative credit history.
Profitability per product govern acceptances and account limits.
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Collections and recoveries depend on the type of customer. Initial calls and letters are followed by account freezes at
approximately 60 days past due, with accounts subsequently transferred to outside collections agencies and charged
off at 180 days past due.
We visited the offices of Swisscard as part of a corporate overview to assess its origination and underwriting policies,
account administration, and risk management processes, as well as its customer service. We consider that Swisscard's
policies and procedures are in line with market practices and are sufficient to support the preliminary ratings that we
have assigned to the notes.
Legal Risk
The jurisdiction and the transaction itself exhibit certain unique features.
Under Swiss law, it is not possible to assign future receivables. In the context of this transaction, the assignment and
transfer of receivables under the designated accounts can only occur once the receivables exist. Should receivables
only exist after the originator has become insolvent, the originator's administrator would make the decision whether to
assign them to the asset SPE. We have obtained legal comfort that interest on the revolving principal balance and the
associated late payment fees would be assigned to the asset SPE following the insolvency, regardless of the
administrator's decision. The assignability of remaining fees such as card fees, ATM fees, and conversion fees isn't
clear. Finally, any principal receivables generated following the originator's insolvency wouldn't be assignable to the
asset SPE. For details on our approach to modeling these features, see "Yield".
• The asset SPE and the issuer are both majority owned by Swisscard-- selling originator. We expect the two entities
to be bankruptcy remote. In our view, the following features will ensure this status:
• Swiss law provides for separate insolvency proceedings of parent and subsidiary companies;
• We have received a non-consolidation legal opinion;
• Both SPEs will have members of the board of directors who will be independent from the Credit Suisse group, and
who will have veto rights over any decisions to file the SPEs into insolvency; and
• The shareholder structure of each company will include two independent shareholders who each hold 1% in each
SPE, and Swisscard will own the remaining 98% in each. Any decisions that could lead to petitioning of the SPEs
into insolvency will require 99% shareholder consent.
The risk of any amendments to the articles of association of either SPE, and the petitioning into insolvency that could
follow, will therefore be appropriately mitigated, in our view, as Swisscard would need the consent of at least one other
shareholder to pass any amendments under the 99% shareholder consent requirement. This provides further comfort
that no individual shareholder could push through amendments that could be detrimental to the SPEs.
Credit And Liquidity
We have sized credit enhancement levels after analyzing the impact that a severe stress scenario would have on the
asset SPE's cash flow.
The variables that we subjected to these stresses include the payment rate, charge-offs, portfolio yield, and purchase
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rate. We analyze these dynamic performance variables to arrive at a steady state for each performance indicator. In
doing so, we have considered fluctuations that are not performance-linked.
Charge-off rate
We derived the steady state base case from charge-offs, lagged by six months, to address the growth in the receivables
balance. The definition of charge-off is 180 days in arrears. We applied rating multiples to the steady state, to
determine the cash flow model inputs at the respective rating levels.
In assigning a base case charge-off rate it is instructive to review delinquency trends, which can be leading indicators
of charge-off trends (see charts 2 and 3).
Chart 2
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Chart 3
Our base-case charge-off rate assumption is biased toward the charge-off rate exhibited by cardholders on revolving
contracts as, in our view, these are more likely to represent the portfolio composition during an amortization period.
The base-case charge-off rate is 3.5%.
Purchase rate
When assessing the purchase rate assumption, the main risk is that the originator's insolvency will leave it unable to
fund further purchases of receivables. Our purchase rate assumption is, therefore, related to the originator's credit
strength. The level of purchase rate is further complicated by the fact that, under Swiss law, receivables that come into
existence after an originator's insolvency may not be assignable to the asset SPE (see "Legal Risk"). Therefore, we
assumed a 0% purchase rate at all rating levels, and accounted for receivables that may exist just before the
originator's insolvency that could still be assigned to the asset SPE in the initial stage of the early amortization period.
Payment rate
The base case used for our payment rate analysis reflects the detailed historical data summarized in chart 4. The
stresses that we applied to this base-case assumption are commensurate with the respective rating levels in our cash
flow model.
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Chart 4
A higher payment rate ensures that the notes are paid down rapidly in adverse conditions. Transactions that pay down
faster are therefore exposed to lower levels of losses, especially when yield is unable to cover charge-offs and senior
fees. The overall high payment rate observed for the portfolio in chart 4 is mainly attributable to a high proportion of
transactors. The generally decreasing payment rate, which has, however, stabilized in 2009, can be attributed to the
increasing proportion of cardholders with the option to carry their balance from month to month. We have noted the
recent volatility and have factored this into our base-case assessment.
We have set our base-case payment rate at 32.0% to account for the portfolio's likely composition during an early
amortization period, with a heavy bias toward the payment rate of revolvers (cardholders who take advantage of the
revolving option, i.e., carry their card balances from one month to the next). We consider that the total portfolio
payment rate does not represent the likely payment rate during an early amortization period. We have estimated the
payment rate due to cardholders on revolving contracts (see chart 5).
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Presale: Swiss Credit Card Issuance 2016-1 AG
Chart 5
Yield
Total yield income represents both interest and fees on the total outstanding receivables balance, and consists of
transaction fees, annual card fees, interest on the revolving balance, and insurance commission, as well as interchange,
conversion fees, and recoveries. A discounting mechanism generates conversion fees separately in our cash flow
model, so our base-case yield rate excludes conversion fees (see "Foreign exchange fee mechanism").
We give no benefit to the insurance commission proceeds, other recoveries, or interchange when determining our
base-case yield rate.
Similar to the considerations surrounding the purchase rate, any finance charge receivables generated after the
insolvency of Swisscard would not be assignable to the asset SPE. The outcome of the legal analysis is such that any
interest charged on the revolving balance and any annual card fees billed before insolvency would be ancillary to the
principal receivables that have arisen under the designated accounts before insolvency. As such, the interest would
form part of the finance charge receivables assigned to the asset SPE, but the annual card fees could not if the
cardholders' use of credit cards remains funded by an insolvent entity, whereby the fees could be assigned to the
selling originator's insolvency estate.
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Presale: Swiss Credit Card Issuance 2016-1 AG
Chart 6
We have assigned a post-insolvency base case of 4.0%. This accounts for the potential collapse in yield proceeds as a
result of the loss of annual fees, along with the effect of worsening charge-offs.
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Presale: Swiss Credit Card Issuance 2016-1 AG
Chart 7
Owing to the fixed-rate nature of each class of notes, the rising and falling Swiss franc LIBOR scenarios vary to a very
limited degree under our cash flow analysis. Additionally, we applied haircuts to reflect various rating levels.
Chart 8 shows the likely amortization of the class A notes under our 'AAA' run.
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Presale: Swiss Credit Card Issuance 2016-1 AG
Chart 8
Counterparty Risk
Counterparty risk arises from Credit Suisse as the asset SPE account bank. The transaction is also exposed to Zuercher
Kantonalbank as the issuer account bank provider. We consider our ratings on these entities and the
downgrade/replacement language for the account bank to be in line with our current counterparty criteria (see
"Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013).
Set-Off Risk
The transaction's exposure to set-off risk due to Credit Suisse being a deposit-taking institution was reduced
considerably after the business transfer.
The minimum originator interest will remain unchanged from previous issuances to cover any remaining exposure.
The residual set-off exposure will be recalculated semi-annually during the transaction's life and then monthly
following a notification event or if the reported residual set-off risk exceeds 2.6%. The variable component of minimum
originator interest will trail the set-off exposure as the amount reported plus a 30% buffer (as a percentage of the
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Presale: Swiss Credit Card Issuance 2016-1 AG
exposure) to cover the inter-reporting period fluctuations. The variable component is subject to a floor of 3.4%. The
arranger confirmed that the enhancement provided by the variable component of minimum originator interest will
remain in the transaction.
Commingling Risk
Cardholders pay into an account in the servicer's name. Funds in this account are swept within two business days of
being processed into an account held by the asset SPE. If the servicer becomes insolvent, there is a risk that funds in
the collection account may be trapped in the servicer's insolvency estate.
The risk is addressed by cardholder notification. Once our rating on the servicer drops below 'BBB' with a short-term
rating of 'A-2', or below 'BBB+' otherwise, the cardholders would be notified to pay directly into the asset SPE's
account. If notification occurs before the servicer's insolvency, commingling risk will be fully mitigated.
Scenario Analysis
Methodology
For rating credit card transactions, we have developed a scenario analysis and sensitivity-testing model framework,
which attempts to demonstrate the likely impact of scenario stresses on the ratings we assign in a transaction.
As a part of our scenario analysis and sensitivity-testing approach, we re-rated the transaction, assuming that the three
key variables (charge-offs, payment rate, and yield) have deteriorated (see "Scenario Analysis: Charge-Off And
Payment Rate Movement May Determine Downgrades In European Credit Card Sector," published on May 12, 2009).
For the purpose of this analysis, we have included the following stress scenario in table 3 to demonstrate the rating
transition of a class of notes.
Table 3
Scenario Stresses
Scenario 1 (relative stress to base case) Scenario 2 (relative stress to base case)
Charge-off (%)
30.0
50.0
Payment rate (%)
(10.0)
(20.0)
Yield (%)
(10.0)
(20.0)
It is worth noting that our base-case assumptions for each transaction are intended to be "best estimates" of future
performance (non-stressed) for the asset portfolio. Our approach in determining these base cases would consider
historically observed performance and an expectation of potential changes in these variables during the transaction's
life. The sensitivity of rated bonds in each transaction will differ depending on these factors and on its structural
features, including reliance on excess spread, payment waterfalls, and credit enhancement levels.
After changing the base case for sensitivity analysis, in line with table 4, we applied our standard rating methodology
that we use to rate the transaction. At the same time, we did not change our purchase-rate assumption and
interest-rate curve.
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The output of the analysis shows the likely rating transition of the rated notes—given the applied stresses, and the
value and timing of any forecasted principal and interest shortfalls.
Transaction Analysis
When applying scenario stresses in the manner described above, the result of the modeling is intended to be a
simulation of what could happen to the ratings on the notes for the given transaction. In our analysis of this
transaction, we applied the scenarios described above in our cash flow modeling. Tables 4 and 5 show our implied
base-case stresses and scenario stress results.
Table 4
Rating Variable
Base case Scenario 1 stress case Scenario 2 stress case
Charge-off (%)
Payment rate (%)
Post-insolvency yield (%)
3.50
4.55
5.25
32.00
28.80
25.60
4.00
3.60
3.20
We observe that, under each scenario, the initial ratings on the notes could transition to the ratings indicated in table 5.
Table 5
Scenario Stress Analysis Results
Class
Initial rating Scenario 1 stress test rating Scenario 2 stress test rating
A
AAA (sf)
AA (sf)
A+ (sf)
B
A+ (sf)
A- (sf)
BBB+ (sf)
C
BBB+ (sf)
BB+ (sf)
BB+ (sf)
For our credit stability criteria analysis, due to the short-term nature of the assets, we compare scenario 1 ratings
transitions with the one-year ratings transitions limits as per our 2010 credit stability criteria. The transitions of all of
the notes are in line with those limits and, as such, do not create a cap on the maximum achievable rating of any on
the notes.
Monitoring And Surveillance
We consider that credit card transactions are exposed to any change in the following principal performance indicators:
• Monthly payment rate,
• Charge-off rate, and
• Yield.
It is difficult for these parameters to move in isolation, and an improvement in the performance of one parameter can
compensate for deterioration in the performance of another. Furthermore, flexibility is built into the stress ranges we
have applied, which allows the structure to absorb some upward movement in, say, charge-offs, without a
corresponding rise in yield or payment rates.
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We will continually monitor the collateral performance for any adverse effect on the ratings on the notes.
Related Criteria And Research
Related criteria
• Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, May 29,
2015
• Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of
Collateral Upon A Nonmonetary EOD, March 2, 2015
• Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014
• Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013
• Counterparty Risk Framework Methodology And Assumptions, June 25, 2013
• Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012
• Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• Methodology: Credit Stability Criteria, May 3, 2010
• Understanding Standard & Poor's Rating Definitions, June 3, 2009
• Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009
• European Consumer Finance Criteria, March 10, 2000
Related research
•
•
•
•
•
•
•
•
•
European Economic Snapshots, April 12, 2016
Europe Is Still Holding On, Amid Negative Rates And Brexit Risk, April 6, 2016
How We Rate And Monitor EMEA Structured Finance Transactions, March 24, 2016
2015 EMEA ABS Scenario And Sensitivity Analysis, Aug. 6, 2015
European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic
Factors, July 8, 2014
Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors
On Credit Quality, July 2, 2014
New Issue: Swiss Credit Card Issuance 2015-2 AG, June 15, 2015
New Issue: Swiss Credit Card Issuance 2015-1 AG, June 15, 2015
Scenario Analysis: Charge-Off And Payment Rate Movement May Determine Downgrades In European Credit Card
Sector, May 12, 2009
Additional Contact:
Structured Finance Europe; [email protected]
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