Today, President Obama is expected to sign new legislation that will place limits on the fees and interest rates charged to consumers using credit cards (see WSJ article). While we can argue the benefits and unintended consequences of such legislation (doesn't it seem like we are using the term "unintended consequences" a lot lately), from a trading and investment perspective, there is an expectation that revenue generated by the fees and interest rates - which are now being scaled back - will begin to dry-up for many credit card companies. Subprime borrowers and others holding balances are the cash cows for credit card companies, given that those that don't really need credit tend to use the cards more for convenience, or as a way to gain points and a month of "free" float before paying off their balance in-full.

Estimates have the credit card industry losing $10 billion in revenue from overall interest income. In addition, companies such as Bank of America, Citigroup, Discover, and Capital One Financial are estimated to get between approximately 27-30 percent of their business from subprime customers. Others potentially hit by the new legislation include General Electric - the biggest issuer of private-label cards in the U.S., and Target, which issues its own cards to customers. Unfortunately, Citigroup also issues about 22 percent of all private label cards - not that they need another reason to lose revenue.

While the market still needs to shake out this latest development, it seems that taking away a large source of revenue, and making it more difficult for companies to price their risk, cannot be good for the credit card companies. The general impact on retail sales, increased costs to credit-worthy customers (annual and monthly fees), and the availability of credit for everyone, also seem to be things that cannot be ignored.

In yet another example of the credit crisis migrating down the food chain, lenders are now giving out smaller and more expensive lines of credit to retailers than they were just last year (see Financial Week article). Not surprisingly, retailers are securing less asset-based loans, which traditionally used real estate, inventory, and other assets as collateral. By the end of August of this year, major retailers had received 16 loans valued at $4.6 billion, compared to 40 loans worth about $8.8 billion during the first eight months of 2007. Why the falloff? For one, less retailers have been taken private, thereby lowering the number of retailers and firms that are seeking out asset-based loans for leveraged buyouts. The rates charged have also increased, going from 125 bps over Libor to 225 bps over Libor on the low end. Finally, advanced rates, or the percentage of collateral that is advanced to the borrower, have been cut. Previously, advanced rate were between 95-100 percent. The rates are now closer to 85 percent as real estate and inventory values have declined.

Of interest is that the rise in borrowing costs and lower advanced rates have changed the types of companies that are seeking out and getting loans. Stronger companies that previously may have taken advantage of lower rates and the tax advantages of borrowing are shying away from asset-based loans. Now, on average, the companies that appear to be taking out such loans are those that are often being forced to secure financing, and may themselves be in a less stable situation. Given recent weak retail sales data, not to mention lower consumer borrowing (and subsequently lower consumer spending - see Bloomberg article), the number of companies (especially the speciality retailers) that need to agree to less friendly loan terms may be on the rise. Credit terms, and even the need to secure financing itself, may be one more indicator that traders and investors can use to identify those companies that are most likely to weather the current credit storm.

Many outlets are reporting that retail sales are up 0.2% when economist were expecting them to be flat at best. Don't forget that retail sales are given in nominal terms (not real terms), and are not adjusted for inflation. For instance, if you buy the same quantity of items, but they are 3% more expensive, retail sales will be up 3%. Digging deeper in the data we find that we spent less on furniture, clothing, and appliances (new things we don't need, at least not right now), and more on food and gasoline (things we do need). As it turns out, excluding gasoline, sales were unchanged, which was probably better than expected. We also probably bought less gas, but it was up 11% this year (6.9% in February), resulting in higher overall retail sales numbers.