European credit cards are evolving into a sizable, homogenous asset class, although, compared to the U.S. counterpart, it still remains relatively untapped. While originators over the last couple of years have made significant headway in the U.K. securitization market, the same hasn't really been a trend in continental Europe.

"Credit cards and the use of consumer debt has grown generally in Europe," said Kevin Ingram at Clifford Chance. "However, credit card ABS has been less utilized on the continent where you typically won't see huge deals, as the use of credit cards is less extensive. There have been maybe one or two deals from France and that's about it."

"Basically, it's been a U.K.-dominated market because the consumer pattern of use of credit has come up very similar to the U.S.," he added.

According to a recent Fitch Ratings report on European credit cards published in May (see ASR 6/9), U.K. credit card spending has tripled since 1993 to GBP101 billion a year (U.S.$167.4 billion). The number of clients rose to 61.4 million in 2003 from 25.3 million in 1994. The use of credit cards pre-Basle II regulations required the heavy use of capital, explained Ingram. And unlike European banks, such as Barclays and Royal Bank of Scotland (RBS), the U.S. institutions that moved in the early 1990's were not hedged institutions but monoline credit card banks exposed only to credit card risks.

Credit card ABS issuers are split into two broad camps in the U.K. "[There are] people who view it as a regular funding source - in particular, as a way of leveraging capital ... this would include the U.S. entities with subsidiaries in the U.K. like MBNA America Bank and Capital One Financial Corp.," explains Ingram. "Then you have the more opportunistic issuers such as Barclaycard (although rapidly becoming a more programmatic issuer) and RBS. The fundamentals of opportunistic issuers are quite different because they are not doing it as part of a funding program and they look at credit cards as a way of raising finance in very favourable market conditions and for diversification."

Unlike the monoline-styled U.S. lenders, European banks exist as institutions that have a variety of asset classes to choose from because their portfolios vary from retail to commercial lending business. Credit card-concentrated institutions have portfolios composed of 100% risk- weighted assets and are heavy users of securitizations. Their capital costs are quite high and the only way they can continue to expand is to make every ounce of their capital work harder - and the only way to achieve that is to do transactions that release capital.

"When U.K. credit card issuers go into Europe, it will be the same thing," said Ingram. "To grow the business you will have to generate the assets and then obtain capital release for those assets so that you can generate more assets, and so on. Because of that we will continue to see significant volumes in credit card securitizations because originators have a good reason to do it." He added that investors seem to like the product.

Credit card ABS has managed to thrive even in the face of profound market disruption, such as the post- Sept. 11 scenario. According to Debashis Dey at Clifford Chance, at least one deal priced the following October, a testament to investors' confidence in and understanding of this product.

"On the macroeconomic level, to some extent you can view the U.S and U.K. economies supported basically by consumer spending, and that's really what's kept the economy up in times of manufacturing recession," he said.

U.S. comes to the U.K.

Apart from Barclays and RBS, there really have not been any other big banks that have been doing these deals. Historically, consumer securitization has been backed by retail channels such as mortgages. Credit cards have lagged behind, however, but over the last two to three years, the market has taken off with an average of 10 transactions a year in the credit card sector.

The growth in the U.K. market has in part been led by the ability to better analyze portfolios, as more historical data builds. Some U.K. credit card portfolios are comparable or better than U.S. portfolios, said Laura Stuart at Clifford Chance. Some U.K. portfolios are becoming more attractive to the U.S. investor base because a better story has emerged in terms of probability of default in U.K. portfolio data versus U.S. portfolio data (perhaps due in part to the higher level of personal bankruptcy declarations in the U.S versus U.K.).

"Recent experiences on the Barclaycard program has demonstrated favorable pricing for U.S. dollar- denominated transactions selling into the U.S. domestic market," Stuart said. "It might be said that the U.K. transactions present traditional U.S. credit card investors with desirable diversity: credit card ABS represents a known asset and the master trust deals have familiar U.S.-style structural features, but access to U.K. collateral and therefore outside exposure to the U.S. consumer economy." It is a clear theme of the European credit card ABS market, she said, to try to use structures that are recognizable for traditional U.S. master trust credit card ABS investors.

The strength of marketability of U.K. portfolios in the European ABS market appears to be growing: "For example, some U.S. credit card issuers formerly tended to tap the European investor base through repackaged issuance from their U.S. master trusts (repackaged through a Cayman or Jersey vehicle into the European market)," said Stuart. "However, that sort of repackaged issuance has declined in favor of utilization of their increasingly strong platform for doing European issuance directly out of their U.K. programs."

And into the continent

they move

But it's not just diversifying structures to attract a U.S. dollar investor base that defines the present market. U.K. lenders are flirting with the possibilities of a growing customer base in continental Europe. Originators are still limited by the volumes of customers that they have on the continent, a trend primarily attributed to a culture that does not understand the dynamics of charging.

Clients on the continent prefer using debit-like cards where balances are paid off monthly, but this creates less yield opportunity from interest rates that are charged to U.K. consumers, who tend not to pay off entire balances. "There is still gap over how customers use their credit cards in the U.K. and U.S. vs. continental Europe," said Dey. "If you look at how quickly a customer base grows, or how often they use their cards, or what they use their cards for, it's a different pattern entirely and it will take some time before you see large enough volumes to make them significant."

However, the trend is changing, said Dey. There is a gradual acceptance of credit. The industry need only look at development in the U.K. market that saw little activity until the mid-1990's when the big U.S. companies migrated across the Atlantic.

In terms of structures, they should emerge as relatively the same as the established U.K. platforms. "The reality is that nobody in this market wants to have a product that is completely different - it just doesn't work," said Ingram. One originator from central Eastern Europe presently trying to do a deal was cautioned from day one that, while the industry will accept some variations on the theme, the market wants to see something similar to the U.K. platforms.

But to what extent will U.K.-based originators have to change their business approach to fall in line with the changing European Union credit directives? According to Dey, there are a number of emerging issues regarding how banks will be allowed to extend credit to clients. For the most part, the originators that Clifford Chance has worked with have concentrated on the U.K. framework but must consider a different approach to the continent. "We have a unique situation of bureaucrats in Brussels, from markets where there is actually not a lot of credit interest on a consumer level, regulating a product that really has a lot of history and experience in the U.K.," he said.

Dey added that there has been a concerted effort of behind-the-scenes lobbying by the industry, and over the next couple of years the industry should better understand how these new directives are expected to affect the development of a credit card market across Europe.

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