Fitch: J.C. Penney's Downgrade Will Not Affect Credit Card ABS

CHICAGO--()--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 spread compression.

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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Contacts

Fitch Ratings
Steven Stubbs
Senior Director
U.S. Structured Finance
+1 212 908-1676
1 State Street Plaza
New York, NY
or
Cynthia Ullrich
Senior Director
U.S. Structured Finance
+1 212 908-0609
or
Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com