Why is the MPR for credit card receivable-backed securities important?
What will be an ideal response?
Credit cards are issued by banks (e.g., Visa and MasterCard), retailers (e.g., JC Penney and Sears), and travel and entertainment companies (e.g., American Express). The cash flow for
a pool of credit card receivables consists of finance charges collected, fees, and principal. Finance charges collected represent the periodic interest the credit card borrower is charged based on the unpaid balance after the grace period. Fees include late payment fees and any annual membership fees. Interest to the bond classes is paid periodically (e.g., monthly, quarterly, or semiannually). The interest rate may be fixed or floating.
Assuming the period is a month, then the monthly payment rate (MPR) expresses the monthly payment (which includes finance charges, fees, and any principal repayment) of a credit card receivable portfolio as a percentage of credit card debt outstanding in the previous month. For example, suppose a $600 million credit card receivable portfolio in February realized $60 million of payments in March. The MPR for March would then be 10% ($60 million divided by
$600 million).
The MPR is important for two reasons. First, if the MPR reaches an extremely low level, there is a chance that there will be extension risk with respect to the principal payments to the bond classes. Second, if the MPR is very low, then there is a chance that there will not be sufficient cash flows to pay off principal. This is one of the events that could trigger the early amortization provision.
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