Credit card ABS excess spread has fallen to levels not seen in ten years, according to the latest Credit Card Indexes report from Fitch Ratings. The rating agency added that U.S. consumers are still falling behind and defaulting on their credit cards.
The results show the three-month excess spread index falling below the 5% threshold, which has not occurred since November 1998.
Excess spread remains a key measure of credit card ABS performance as it protects credit card ABS investors against early amortization and potential losses, said Michael Dean, managing director from Fitch. The declines we have seen recently have been muted somewhat by issuers actions to offset the rapidly rising charge-off environment and current levels while low by historical measures still provide a healthy cushion against higher charge-offs going forward.
Junes charge-offs, at 10.44%, are 62% higher on a year-over-year basis. Meanwhile, 60+ day delinquencies dropped seven basis points to a record high at 4.45% this month. Fitch expects charge-off increases to slow in the upcoming quarter, but no actual improvements are predicted.
The June credit card ABS reading covering the May collection period fell from 5.80% to 4.83%. The ratings on many trusts remain stable as issuers have increased credit enhancement and added the discount option.
Many trusts have spread accounts supporting the class C notes, and once the excess spread falls below 4% or 4.5%, the excess spread is captured in the account rather then distributed to the issuer.
This month, there as six trusts trapping excess spread: BA Master Credit Card Trust II, Series 1999-J, 2000-E, and 2001-C; Capital One Multi-asset Execution Trust, Series, Class D; Chase Issuance Trust, Class C; First National Master Note Trust, Series 2008-3; National City Master Note Trust 2008-1, 2008-2, and 2008-3; and Washington Mutual Master Note Trust, WaMu Card Series.
According to Fitch, excess spread is compressing as a result of rising charge-offs, which rose past 10% to another record high. Had there not been strong gains in gross yield, which was 17 basis points higher, the effect on excess spread would have been worse. As it is, prime rate is 175 basis points lower year-over-year, the rating agency said.
The outlook for subordinate tranches has also become increasingly negative, especially given recent delinquency and personal bankruptcy filing trends, but Fitch continues to expect current ratings of senior tranches to remain stable.