Moody’s Investors Service has assigned a definitive rating of Aaa to the Applause 2010-1 Beneficial Interests backed by credit card receivables.
The rating addresses the expected loss posed to investors by the legal
final maturity date. The structure allows for timely payments of
dividends (in scheduled amounts, on scheduled payment dates), and ultimate payment of principal by the legal final maturity date.
The rating and transaction summary follow:
Deal Name: Applause 2010-1 Beneficial Interests
Series 2010-1 Beneficial Interests, Definitive Rating Assigned Aaa
Issue Amount: JPY 6.0 billion
Payment Frequency: Monthly
Initial Entrustment Date: March 24, 2006
Beneficial Interests Transfer Date: March 25, 2010
Revolving Period: From March 2010 to February 2011
Expected Maturity Date: December 28, 2012
Legal Final Maturity Date: March 31, 2016
Underlying Assets: Credit card receivables (card purchase receivables and cash advance receivables)
Moody’s assigned a provisional rating of (P)Aaa to the beneficial interests on March 1, 2010.
Structure Outline and Opinion Summary
The Seller entrusted a pool of eligible credit card receivables and cash
to the Asset Trustee, which then issued the Series 2010-1 Beneficial Interests (Senior Beneficial Interests), a Subordinated Beneficial Interest, a Seller’s Beneficial Interest and a Reserve Beneficial Interest.
Entrustment of the receivables was perfected against third parties under
the Perfection Law (the Law Prescribing Exceptions, Etc. to the Civil Code Requirement for Setting Up Against a Third Party to an Assignment of Claims and Chattels [Law No. 104, 1998]). Unless a specific event occurs, perfection against the obligors will not be made.
While the seller holds the Subordinated Beneficial Interest, Seller’s
Beneficial Interest and Reserve Beneficial Interest, the Series 2010-1 Beneficial Interests was transferred to Investors.
The transfer of the Series 2010-1 Beneficial Interests was perfected
against the relevant obligors and third parties under Article 94 of Trust Law. Thus, the risk of interruption to cash flow from the assets due to the seller’s or the Trustees’ bankruptcy is considered sufficiently
minimal to achieve the rating assigned.
Credit enhancement is provided by the senior/subordinated structure and
available excess spread. Subordination comprises approximately 36.1% of the investors’ beneficial interests (total of the Series 2010-1 Beneficial Interests and the Subordinated Beneficial Interest).
The Series 2010-1 Beneficial Interests will be redeemed in a sequential,
monthly, controlled amortization after a one-year revolving period. Subordination on the transaction’s liability side will build up over time thanks to the sequential pay structure.
Additional enhancement will be built up in accordance with the pool’s
performance deterioration through a dynamic reserve mechanism. In Moody’s view, these arrangements will help protect the transaction from volatility in the performance of the pool.
If early amortization events occur, the dividend waterfall to the
Subordinated Beneficial Interest will cease and excess spread will be
used to redeem the Series 2010-1 Beneficial Interests Key early
amortization events include the default rate exceeding its trigger level. The structure mitigates credit risk and contributes to rating stability.
In preparation for servicer replacement, liquidity is provided in the form of a cash reserve at closing. This reserve will cover the dividend payments on the Series 2010-1 Beneficial Interests, the trust fee payments, the start-up costs of back-up servicing, and the fees for back-up servicing. Commingling risk is covered by the Seller’s Beneficial Interest.
The seller, as initial Servicer, has substantial experience in the credit card industry. Moody’s has examined the seller’s operations and considers the company sufficiently capable of servicing the underlying assets. If a servicer replacement event were to occur, the Asset Trustee would be able to dismiss the Servicer. A back-up servicer was appointed at closing.
The underlying assets comprise credit card receivables. Moody’s analysis factors in the receivables’ attributes, historical data on the seller’s entire pool, ongoing performance data on existing securitization pools, and credit card industry trends.
As a result, Moody’s estimates the annual default rate at 12% to 14%; the rating agency also assumes the base scenario of the monthly principal payment rate and yield as 5% to 7% and 15% to 17% respectively. These parameters are estimated based on the transaction’s definition, which may differ from the seller’s definition.
Reference to Relevant Methodology
The principal methodology used in rating the transaction was “Moody’s
Approach To Rating Credit Card Receivables-Backed Securities,” published in April 2007 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this transaction can also be found in the Rating Methodologies sub-directory on Moody’s website. Further information on Moody’s analysis of this transaction is available on www.moodys.com. In addition, Moody’s publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.
The V Score for this transaction is Low/Medium, the same score assigned
to the Japanese Credit Card Cash Advance ABS sector.
Moody’s has assigned ratings to securitizations of Credit Card receivables, backing this transaction, since 2006, and to securitizations of the seller’s other credit card receivables since 2002. Moody’s
conducted the analysis using historical data, including that which
Moody’s had received for those past transactions.
This transaction’s structure — the waterfall, the redemption of the Beneficial Interests, etc. — is a common one, and the transaction’s complexity is similar to that of a typical Credit Card Cash Advance ABS.
Moody’s V Scores provide a relative assessment of the quality of available credit information and the potential variability of various inputs in a rating determination. The V Score ranks transactions by the potential for significant rating changes owing to uncertainty on the assumptions due to data quality, historical performance, the level of disclosure, transaction complexity, modeling, and the transaction governance that underlie the ratings. V Scores apply to the entire transaction (rather than to individual tranches).
If the assumed annual default rate used in determining the initial rating
were changed to either 17.8% or 22.8%, the quantitative or model-indicated Parameter Sensitivities for the Series 2010-1 Beneficial Interests in these two scenarios would be zero notches down for the former and one notch down for the latter.
Summary of Parameter Sensitivities follow:
1) Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time, but to provide a quantitative
calculation of how the initial rating might change, if key input
parameters used in the initial rating process differed.
2) The analysis assumes that the deal has not aged. Thus, the analysis does not factor in structural features such as a sequential payment effect, a default trap mechanism, or a dynamic reserve mechanism.
3) Parameter Sensitivities reflect only the ratings impact of each scenario from a quantitative or model-indicated standpoint. Qualitative
factors are also taken into consideration in the ratings process, so the actual ratings assigned in each case could vary from the information
presented in the Parameter Sensitivity analysis.
4) A deviation from the expected range will not necessarily result in a rating action. The stability of the initial rating may, to some extent, hold so long as the incorporated structures described above function properly and the decision to take (or not to take) a rating action depends on the assessment of factors such as the level of credit
enhancement at the time.
The special reports, “Updated Report on V Scores and Parameter Sensitivities for Structured Finance Securities” published in December 2008, and “V Scores and Parameter Sensitivities in the Global Consumer Loan ABS Sector,” published in May 2009, are available at www.moodys.com.
Moody’s Investors Service is a publisher of rating opinions and research.
It is not involved in the offering or sale of any securities, nor is it acting on behalf of the offering party. This release is not a solicitation or a recommendation to buy, hold, or sell securities.