Standard & Poor's Reaffirms Certain Opinion Criteria For U.S. Credit Card Transactions.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 10, 2003

Standard & Poor's routinely provides ratings for securities issued in U.S. credit card transactions. In response to recent inquiries regarding its criteria for the delivery of opinions relating to transfers of assets in U.S. credit card transactions by national banks or by state-chartered banks, whose deposits are insured by the U.S. Federal Deposit Insurance Corp. (FDIC), Standard & Poor's is reaffirming that it generally will require either an FDIC/D'Oench opinion or an FDIC/Sale opinion for each such transfer of assets by an FDIC-insured bank.

Credit card transactions involving FDIC-insured banks are structured as either a one-tier transaction or a multiple-tier transaction. In a one-tier transaction, the FDIC-insured bank typically sells its credit card receivables directly to a special purpose entity (SPE) that will issue securities. Typically, the SPE is a common law master trust established pursuant to a pooling and servicing agreement.

Although FDIC-insured banks traditionally have utilized a one-tier structure, many FDIC-insured banks now utilize multiple-tier structures for bank regulatory, accounting, tax, or other reasons. In a multiple-tier structure, an FDIC-insured bank may transfer its credit card receivables to an operating company, which in turn transfers the receivables to an intermediate SPE, which then transfers the receivables to an issuing SPE. Alternatively, an FDIC-insured bank may transfer its credit card receivables to an intermediate SPE, which then transfers the receivables to the issuing SPE. In both cases, the issuing SPE usually is a common law master trust established pursuant to a pooling and servicing agreement.

In addition to these one-tier and multiple-tier structures, many FDIC-insured banks in credit card transactions have been establishing a second issuing SPE that is usually a statutory business trust. In these transactions, the master trust may issue to the FDIC-insured bank an unrated collateral certificate, representing an undivided beneficial interest in the credit card receivables held by the master trust, and the FDIC-insured bank then transfers that collateral certificate to the statutory business trust pursuant to a trust agreement or other agreement. The statutory business trust typically issues rated notes according to the terms of an indenture and pledges the collateral certificate to the indenture trustee as collateral security for the trust's obligations under the rated notes. As a result of the statutory business trust holding the collateral certificate, cash flow that is allocated to the collateral certificate by the master trust after the payment of any senior class costs at the master trust level is transferred to the statutory business trust, and the trust uses that cash flow to make payments of principal and interest on the rated notes.

Some of the transactions that use a statutory business trust are structured in a manner that permits an FDIC-insured bank to transfer both collateral certificates and its credit card receivables to the trust. Similar to the collateral certificates, the statutory business trust pledges the credit card receivables to the indenture trustee as collateral security for the trust's obligations under the rated notes, and proceeds from the receivables are used by the trust to make payments of principal and interest on the rated notes.

Issuing notes from a statutory business trust structure is intended to take advantage of accounting regulations changes and allow issuers to structure first loss collateral certificates as notes. These notes are then treated as debt (rather than equity) for tax purposes. Classification as debt eliminates both the transfer restriction, which requires, under the tax code, that holders of equity securities receive permission from the issuer before selling their collateral certificate, and the sale restriction under the Employee Retirement Security Act.

In all structured finance transactions, Standard & Poor's criteria focuses on the insolvency laws that are applicable to the transferor of assets and attempts to minimize the risk that the assets will not be available for timely payment on the rated securities due to the insolvency of the transferor. The provisions of the Bankruptcy Code are not applicable to the insolvency proceedings of an FDIC-insured bank. However, under Section 11(c)(3)(A) of the Federal Deposit Insurance Act (FDIA), the FDIC is authorized to accept appointment as receiver or conservator for an insured state depository institution. In addition, under Section 11 (c)(1) and (2) of the FDIA, the FDIC is authorized to accept appointment as conservator and is required to be appointed as receiver for a national bank. Under the FDIA, the FDIC acting in its capacity as conservator or receiver of an insolvent FDIC-insured bank has expansive powers, including, among other things, the power to repudiate any contract.

In order to obtain legal comfort that the credit card receivables and collateral certificates transferred by an FDIC-insured bank will be available to make timely payments to the holders of the rated securities in the event of the insolvency of the FDIC-insured bank, Standard & Poor's generally requires delivery of either an FDIC/D'Oench opinion or an FDIC/Sale opinion.

With respect to transactions in which transfers of credit card receivables and collateral certificates are structured as loans and the parties are relying on the grant of a security interest by an FDIC-insured bank in the receivables and collateral certificates, the FDIC has set forth in a policy statement that it would not seek to avoid an otherwise legally enforceable and perfected security interest if certain conditions were satisfied. In such transactions, Standard & Poor's criteria generally requires delivery of an FDIC/D'Oench opinion to the effect that the applicable conditions have been satisfied and that the security interest granted by the FDIC-insured bank in the credit card receivables and collateral certificates would not be subject to avoidance if the FDIC were appointed as receiver or conservator of the FDIC-insured bank. Also, Standard & Poor's generally requires inclusion of the appropriate Article 9 Representations and Warranties in the applicable agreement or, in certain circumstances, a security interest opinion. For a comprehensive discussion of the Article 9 Representations and Warranties, see the Standard & Poor's article "Revised Article 9 of the Uniform Commercial Code: New Standard & Poor's Criteria", dated June 2001. The article is available to subscribers of RatingsDirect, Standard & Poor's web-based credit analysis system at www.ratingsdirect.com; under "Criteria". The article is also available at Standard & Poor's website at www.standardandpoors.com, where it can be found under Credit Ratings, choose Credit Ratings Criteria then SF Legal Criteria.

In transactions where transfers of credit card receivables and collateral certificates are structured as true sales, the FDIC has provided in a regulation (Treatment by the FDIC as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection With a Securitization or Participation) that, subject to certain conditions being satisfied, the FDIC would not, by exercising its authority to disaffirm or repudiate contracts under 12 U.S.C. 1821(e), reclaim, recover, or recharacterize as property of the insolvent FDIC-insured bank's estate, the credit card receivables and collateral certificates that have been transferred by an FDIC-insured bank to another entity in connection with a securitization or participation. In these transactions, Standard & Poor's criteria generally requires delivery of an FDIC/Sale opinion to the effect that the conditions listed in the regulation have been satisfied and, therefore, the FDIC would not be able to reclaim, recover or recharacterize as property of the insolvent FDIC-insured bank's estate the credit card receivables and collateral certificates being transferred by the FDIC-insured bank.

For a more comprehensive discussion of Standard & Poor's opinion criteria for transfers of assets by an FDIC-insured bank, see the Standard & Poor's publication "U.S. Legal Criteria in Structured Finance Transactions," dated April 2002, in the section entitled "Securitizations by SPE Transferors and Non-Code Transferors". The publication is available to subscribers of RatingsDirect, Standard & Poor's web-based credit analysis system at www.ratingsdirect.com; under "Criteria". The publication is also available at Standard & Poor's website at www.standardandpoors.com, where it can be found under Credit Ratings, choose Credit Ratings Criteria then SF Legal Criteria.