Arran 2007-A, the long-awaited additional credit enhancement for the Royal Bank of Scotland's U.K. credit cards master trust Arran Funding Ltd., was launched last week, following a correction to calculation errors reported by the issuer late last year.
Last Dec. 5, RBS informed Fitch Ratings that it would be restating some of the historical data of the Arran trust. On Jan. 12 of this year, RBS provided revised performance numbers for yield, charge-offs and excess spread for the monthly reporting periods from December 2005 through October 2006, as well as restated data for the November period using the corrected calculations. The revised data showed slightly poorer performance even following the transaction.
"The new reports suggest charge-offs were over-reported by an average of 29 basis points, while portfolio yield was also overstated by an average of 1.37%, resulting in the excess spread shortfall," said a report by Societe Generale analysts. "The reduction in excess spread was certainly material, although transaction performance remains in line with its peers, and the corrections are unlikely to cause any significant lack of confidence going forward. We expect the originator to have examined the performance data with a fine-tooth comb, to avoid future embarrassment."
But analysts also said that as a result of the calculation errors, the transaction's double-B rated notes priced slightly wider than expected. The RBS deal is modeled similarly to the Capital One and Barclaycard deals that last year priced their double-B notes at 400 basis points and 245 basis points, respectively. Arran's GBP57.9 million ($113.7 million) double-B, 2.95-year euro and sterling tranches both priced at 320 basis points.
According to Fitch, the performance ratios before and after the restatement reveal in absolute terms that charge-offs are lower by an average of 0.5%, yield is lower by an average of 1.6% and excess spread is lower on average by 1.1%. The trust's current charge-off rate remains above Fitch's base case of 5.8%, but it is still in line with a trend currently seen across the credit card industry. Although excess spread is lower than previously reported, the excess spread trapping trigger would not have been breached, and the current three-month average to December is 5.8%, 1.3% above the trapping trigger of 4.5%. Analysts at the agency said that the new transaction will provide additional enhancement to the rated notes. Going forward, excess spread trapping is expected to build quickly, should the spread decline, because of the relatively small tranche sizes compared to the trust size, and its 25% funding at launch.
Despite this shaky start to the year, credit card securitization issuance is expected to rise from low issuance volumes last year. Anka Badea, an analyst on the Barclays Capital securitization research team, said that in 2007, Barclays expects issuance volumes to come at around 6 billion to 7 billion from 3 billion of issuance in 2006.
Badea added that this year she expected to see the trend of spread widening in secondary trades continue across the capital structure, particularly at the triple-B level. "The continued rise in insolvencies will further pressure charge-offs and excess spread levels," said Badea. "However, we see performance stabilizing in the second half of 2007 given the economic outlook, flattening delinquencies and tighter ending criteria."
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