The credit card sector is well positioned for handling any negative impact from the fallout of the Sept. 11 attacks, analysts noted last week, despite the fact that the events already have reduced credit card expenditures and delayed bill payments. Expectations of an economic downturn combined with the current rapidly declining interest rates mean excess spread levels for the majority of issuers are sufficient to weather the storm of a possible 6% percent-plus unemployment rates some are expecting.
Barclays Capital analyst Juliet Jones, who has been in touch with numerous issuers this past week, thinks established, prime players are in the position to perform well. In fact, she believes a 100 to 200 basis point increase in losses in a portfolio such as MBNA - although extreme - is sustainable.
Moody's analyst Steve Macy concurred in a recent teleconference (see story page 8) noting last Wednesday that "credit card use is down dramatically" following the attacks. As a result "delinquencies and losses will rise temporarily," Macy said, adding there should be no impact on CCABS ratings.
With the decreasing purchases due to declines in credit card usage, a risk for some issuers is the threat of stagnating receivables pools. Without a fresh stream of new accounts added to a portfolio, "there is a risk that the required seller's interest may get pierced or that the principal receivables balance in the trust fall below the minimum required level, leading to a payout event if not rectified" Jones notes.
The performance of the subprime or nonprime sector on the other hand is of greater concern, as it will be hit hardest by an economic downturn. However, according to Jones, "credit card-backed deals are structured effectively with credit enhancement levels sized sufficiently to address the risk of default."
In summation, Jones points out that while credit card loss rates have deteriorated since the end of last year as the economy started to sow signs of sluggishness, the enhancement levels in place are sufficient to withstand a short-term downturn. In the long term and in light of the new economic landscape, losses are expected to continue on an upward trend. Of course, she notes the possibility of war, additional terrorist attacks and the length of a recession add to uncertainty.
One interesting twist pointed out by Jones is that the much-hyped bankruptcy reform Bill, will likely be on the back burner for some time. "Most were expecting the bill to be signed into law by the end of this year or early next year, but it looks like it will be pushed back further as congress deals with the current situation," she said.