Capital One Bank Europe's announced plans to cut 750 jobs by yearend at its U.K. headquarters located in Nottingham represents roughly 40% of the firm's total number of employees.
Job losses are expected in areas such as human resources, technology, operations and risk management. The plan is to relocate these roles offshore to reduce costs.
Fitch Ratings said it is discussing the implications these job cuts will have on the Sherwood Castle Funding Trust transactions.
The rating agency said its immediate concern is that the redundancies might impact the servicing and collections of receivables included in the Sherwood Trust transactions. This could negatively affect the performance of deals the agency rates including Sherwood Castle Funding Series 2003-2, 2004-1, 2004-2, 2004-3 and 2005-1.
"We've seen a downturn in performance of credit card receivables across the board," an analyst at the agency said. "It's not unusual to see servicing outsourced, but we want to go through with detail how the outsourcing of the business will take place. What we see in performance of the deals will tell the tale if the servicing will be as effective."
As a result, last week the rating agency revised the outlook for Sherwood Castle's BBB' Class C notes to negative from stable following a review of the transactions. Fitch cited the difficult economic environment for U.K. customers as the primary driver for the rating action. Fitch also examined the performance and highlighted the benefit of Sherwood's subordinated BB' tranches.
"With totally unsecured debt there needs to be much more intensive servicing than with mortgages where you essentially have some security at the end of the day," the Fitch source said.
Sherwood's charge-offs appear to have stabilized around 8% in recent months after a four-month period when they appeared to test 10%. Delinquencies have proved remarkably stable, with 90+ day arrears hovering around 3%, according to Fitch. Reduced charge-offs and strong portfolio yield have allowed excess spread to increase. The three-month average was 5.9% in March up from the lows of 4% to 5% last year.
The rating agency said that, in general, performance in U.K. credit card transactions have shown signs of stabilization over the last few months. "When performance began to deteriorate a lot of originators were taken by surprise and as a result focused on underwriting criteria, injecting extra resources on arrears and the collection end," the Fitch analyst said. "Nonetheless there is still much uncertainty at the moment."
Societe Generale analysts said that the biggest risk for credit card ABS is pending regulatory change resulting from an investigation launched by the Office of Fair Trading on interchange fees. If the fees payable are reduced, it could result in a significant shift in credit card users.
"We believe that interchange will be reduced to a small cash payment rather than as a percentage of the total spend," SocGen analysts said. "Interchange fees pay for interest free periods and provide benefits that attract higher quality users who don't require borrowing. We expect that the removal of these accounts would lead to a significant deterioration in performance." The study is ongoing, with the last comments made in February 2007.
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