This presale report is based on information as of March 30, 2006. The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings.
Preliminary ratings as of March 30, 2006
Class
Preliminary rating*
Preliminary amount (mil. C$)
Recommended credit support (%)
A
AAA
422.5
15.5
Collateral
BBB
77.5
N/A
*The rating of each class of securities is preliminary and subject to change at any time. N/A--Not applicable.
Profile
Closing date: March 31, 2006.
Collateral: Canadian dollar-denominated MasterCard credit card receivables.
Underwriter: BMO Nesbitt Burns Inc.
Seller: MBNA Canada Bank
Master servicer: MBNA Canada
Indenture trustee: BNY Trust Co. of Canada
Rationale
The preliminary ratings on Gloucester Credit Card Trust's (GCCT) fixed-rate asset-backed notes series 2006-1 reflect sufficient credit enhancement protection for the notes at their respective levels. The ratings also reflect assessment of the credit risk associated with the overall quality of the collateral loan pool based on historical portfolio performance, MBNA Canada Bank's historical portfolio performance, and MBNA America Bank N.A.'s experience as an originator and servicer of credit card accounts. In addition, the ratings are based on the effectiveness of the payment structure and the sound legal structure.
Transaction Overview
The series 2006-1 senior and subordinated notes are five-year, fixed-rate notes with an expected principal payment date of March 15, 2011. Similar to most other Canadian credit card transactions, GCCT is set up as a co-ownership structure. The first step concerns the creation of the series 2006-1 co-ownership interests. In this step, MBNA Canada transfers the receivables in the designated portfolio to BNY Trust Co. of Canada, as custodian (which the custodian holds as bare trustee, nominee, and agent of all co-owners and the seller). Standard & Poor's Ratings Services has received a legal opinion that MBNA Canada's rights, title, and interest in and to the designated portfolio have been transferred to the custodian to be governed by the pooling and servicing agreement and any series purchase agreements. This step legally outlines MBNA's and all co-owners' claims to the transferred assets, and also allows the custodian, as holder of an absolute beneficial interest in the portfolio, to take any action against the underlying obligors. Once the receivables have been transferred, the series co-ownership interests are created. Any co-ownership interest created represents an undivided interest in the revolving pool of credit card receivables generated in the designated portfolio.
Once a co-ownership interest is created, it may be sold by MBNA Canada; GCCT was established to purchase these co-ownership interests sold by MBNA Canada. Standard & Poor's has received a legal opinion that this transfer is a true sale of MBNA Canada's beneficial interest in the series 2006-1 co-ownership interest. GCCT issues the series 2006-1 notes, which represent debt obligations of GCCT, secured by, and with recourse limited to, the series 2006-1 co-ownership interest. GCCT is a pass-through vehicle, which holds the co-ownership interest as collateral for the notes. All the cash flow generated by the credit card receivables is allocated at the co-ownership interest level, and this cash flow is then passed through to the notes. The trust is a bankruptcy-remote vehicle. Series 2006-1 is the eighth public term transaction for MBNA Canada and its 15th issuance out of GCCT.
Credit Enhancement
Credit enhancement to the senior noteholders is provided by a 15.5% subordinated note class. The collateral notes are supported by a dedicated spread account funded to required targeted levels depending on current excess spread levels. The reserve account was initially funded with 1.25% at closing and, thereafter, with additional finance charge collections up to the required reserve account levels. The required amounts to be deposited into the reserve account are tied to the level of excess spread in the transaction. As excess spread declines, more amounts are trapped in this reserve account. In addition, both the class A and collateral notes' costs are paid through the flow of available excess finance charge collections.
GCCT's series 2006-1 entered into an interest rate swap, whereby the class A co-owner (custodial swap counterparty) will make monthly floating-rate payments to the swap counterparty (The Toronto-Dominion Bank) and will receive a fixed-rate monthly payment from the swap counterparty equal to the amount of interest due on the class A notes. Because the trust will make floating-rate payments to the swap counterparty from finance charge collections, Standard & Poor's does not factor the swap into the sizing of required credit enhancement levels. Nevertheless, Standard & Poor's reviews the terms of the swap agreement to ensure that the trust is not incurring any additional liabilities as a result of the swap.
Payment Structure
Interest payments
The series 2006-1 notes pay interest semiannually, payable on March 15 and Sept. 15 of each year, beginning Sept. 15, 2006. Interest on the senior notes accrues at the rate of 4.445% per year on the principal amount outstanding. Interest on the subordinated notes accrues at the rate of 4.994% per year on the principal amount outstanding. Interest payable to all classes is distributed monthly if a rapid amortization event is triggered. Unless MBNA Canada is the servicer and has a short-term credit rating of 'A-1' or the equivalent, or makes other satisfactory arrangements, MBNA Canada will not be allowed to co-mingle funds, but will instead be required to make deposits of collections into the collections account daily but never more than 48 hours after receipt.
Principal payments and final maturity
Subject to the earlier commencement of an amortization period, the revolving period for the series 2006-1 notes will end, and the accumulation period will begin on Feb. 28, 2010. The 12-month controlled accumulation period is variable. The length of the accumulation period will depend on the rate of principal collections flowing into the trust and the principal cash flows needed by other series. During the accumulation period, the deal will retain principal collections in a principal funding account up to the aggregate co-owner amount of class A and collateral. Amounts in this account will be paid directly to investors upon a rapid amortization event. A reserve account, funded from excess cash flow up to 50 basis points of the class A co-owner amount, will be available to cover any negative carry risk that may result if investment earnings on the cash deposited in the principal funding account are less than the amount needed to pay investors their monthly interest.
Upon a series payout event, and as long as the interest rate swap is still outstanding, the deal will enter rapid accumulation. Once the deal enters rapid accumulation, all principal collections will be trapped and held in the principal funding account for the benefit of the class A and collateral noteholders until its scheduled payment date. The inclusion of a rapid accumulation period helps to mitigate prepayment risk associated with rapid amortization events.
If there is a trustwide payout event, or if there is a series payout event and the interest rate swap is terminated, the transaction will enter rapid amortization. Upon rapid amortization, all funds in the principal funding account, along with all principal collections, will be paid first directly to the senior noteholders until they reach zero, and then to subordinated noteholders. During this period, interest will also be paid monthly, rather than semiannually, to the noteholders.
It is expected that the repayment of the principal amounts owing under the notes will be made on March 15, 2011. Repayment of the notes may occur earlier, if an amortization event occurs, or later, if there are insufficient funds to repay the notes (which would then result in an amortization event). All payments of principal on the notes and interest thereon will cease on the series 2006-1 termination date, which is 43 months after the respective expected final payment date (Oct. 15, 2014). Standard & Poor's ratings address repayment of principal by the termination date and do not address the likelihood of repayment according to the expected payment schedule.
Payment priority
In the Canadian co-ownership structure, yield, losses, and principal are allocated separately to each co-ownership interest in the same fashion as a U.S. master trust structure. When that cash is passed through to the trust, however, the finance charge collections and principal collections are grouped together and become one large bucket of available funds. Subject to the occurrence of an event of default, all amounts collected and deposited in the distribution account (including any cap amounts received from the counterparty) are then used to pay noteholders in a single cascade waterfall covering the following expenses in order of priority:
Certain fixed expenses and fees to the trust indenture;
Senior noteholders' interest;
Senior noteholders' principal;
Subordinated noteholders' interest;
Subordinated noteholders' principal;
Senior noteholders' premium payments, if any; and
Subordinated noteholders' premium payments, if any.
Trust Performance
MBNA Canada transferred an undivided co-ownership interest to the trust. MBNA Canada has designated a specific pool of MasterCard accounts for this transaction. The receivables, denominated in Canadian dollars, consist of all interest charges, annual membership fees, and certain other fees, and all amounts charged by cardholders for merchandise and services, amounts advanced to cardholders, and all other fees billed to cardholders or posted to accounts. Any recoveries collected from defaulted accounts will also be included in the collections of the trust.
As of March 7, 2006, the Gloucester portfolio included approximately C$4.5 billion in principal credit card receivables. As of Dec. 31, 2005, MBNA Canada's total portfolio annual gross charge-offs averaged 4.84%, with average yield, including interchange, of approximately 19.43%.
Issuer Overview
MBNA is one of the largest VISA and MasterCard credit card issuers in the U.S. Together with its U.K. and Canadian subsidiaries, MBNA International Bank Ltd. and MBNA Canada Bank, MBNA offers credit card products, including cobranded affinity marketing programs, to customers in the U.S., U.K., Ireland, and Canada. MBNA Canada primarily relies on affinity marketing in the acquisition of new credit card accounts. Similar to the MBNA U.S. approach, affinity marketing is conducted through two approaches: solicitation of members of organized membership groups with the endorsement of such group's leadership and direct solicitation of purchased lists.
