Fitch: J.C. Penney's Downgrade Will Not Affect Credit Card ABS
CHICAGO -- November 30, 2012
Fitch does not anticipate any effect on the ratings on the GE Capital Credit
Card Master Trust (GECCC Trust) near term as a result of the downgrade to J.C.
Penney Co. Inc. and J.C. Penney Corporation Inc. (J.C. Penney). Fitch
downgraded the Issuer Default Ratings assigned to J.C. Penney to 'B' from
'BB-' on Nov. 13, 2012.
The J.C. Penney credit card accounts designated to the GECCC Trust are mainly
designed to facilitate in store purchases. General Electric Capital
Corporation underwrites the credit and provides funding for the receivables, a
portion of which is derived from securitization. As of Aug. 13, 2012, J.C.
Penney private label and co-brand cards comprised 23.3% of the trust's total
$17.6 billion in receivables.
Fitch believes GECCC's available credit enhancement is amply sufficient to
support existing ratings, particularly considering the current performance of
the receivables. The current break-even multiple under a 'AAA' stress scenario
is 10x, well above Fitch's benchmark of 4.5x. However, if J.C. Penney
continues to struggle over the longer term card usage could decline and foster
adverse selection, resulting in weaker receivables performance. Should such
performance deterioration become significant, Fitch will review its steady
state assumptions for the J.C. Penney products and the ratings assigned
relative to available credit enhancement.
An Issuer Default Rating (IDR) is an assessment of an issuer's relative
vulnerability to default on financial obligations, and J.C. Penney's was
downgraded due to significant deterioration in sales and gross margin
compression. Fitch's credit card ABS cash flow model includes a purchase rate
stress, which is used to simulate the loss of one or more key partnerships,
retailer bankruptcies, or the effect of regulatory constraints. Purchase rate
is a measure of new receivables generation, but it also measures cardholder
usage. A lower purchase rate results in a declining portfolio and an inability
to reinvest all of the monthly principal collections in newly generated credit
card receivables. Since credit card receivables generate yield, which is used
to pay trust expenses, including interest to bondholders, a failure to
generate new receivables could ultimately result in negative carry and excess
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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