◦credit card receivable backed securities are ABS backed by the pools of receivables owed to banks, retailers, travel and entertainment companies, and other credit card issuers.
◦Credit card receivable backed securities use a structure that enables the issuer to sell more than one series from the same pool of receivables. This means more receivables are added each time a new series is issued. Thus, the balance may never be reduced to zero.
◦The cash ﬂows to a pool of credit card receivables includes ﬁnance charges, annual fees, and principal repayment.
◦Credit cards have periodic payment schedules, but because their balances are revolving, the principal is not amortized. Because of this, interest on credit card ABS is paid periodically, but no principal is paid to the ABS holders during the lockout period, which may last from 18 months to 10 years
◦If the underlying credit card holders make principal payments during the lockout period, these payments are used to purchase additional underlying assets or receivables, keeping the overall value of the receivables pool relatively constant.
◦Once the lockout period ends, principal payments are passed on the security holders. This post-lockout period is known as the principal amortization period.
◦Passthrough structure: principal payments received from credit card holders are distributed pro rate to investors
◦Controlled-amortization structure: This structure relies on the mechanism of a principal window similar to a PAC bond. To protect against the impact of cash shortfalls due to inadequate principal repayments or slow payments by cardholders, the ABS is designed with a relatively low principal payment in the schedule. If there is cash ﬂow shortfall, the ABS investor receives the lower of the scheduled principal payment or a pro rata portion of the principal repayment.
◦Bullet payment structure: As "bullet" implies, investors receive the total principal amount in a single payment. The uncertain nature of principal payments by credit card holders, however, allows for no guarantee that the total principal amount will be available when the bullet payment is due. To overcome this problem, a soft bullet structure is often used. Under this structure, the ABS trustees place the monthly principal payments in an interest-bearing account that is expected to generate enough interest over time to fund the payment of the bullet. The period over which interest is earned, called the accumulation period, usually begins a few months prior to the scheduled bullet payment. Despite the lack of a guaranteed maturity, the scheduled bullet payment is seldom missed in practice.