Securitization investors aren't the only ones getting jittery in the current credit environment. The negative headlines that dominated 2007 seem to be making consumers nervous, and this edginess has translated into scarce deal flow for credit card ABS.

Credit card issuance totaled 470 million ($689 million) in 2007 - approximately an 81% year-on-year drop when compared to 2006, according to market figures reported by Societe Generale. Consumer ABS issuance slowed down significantly in 2H07. The slowdown, Royal Bank of Scotland analysts said, is mainly linked to the decrease in consumer borrowing and spending, along with waning consumer confidence.

On a positive note, consumers look like they are keeping their affairs in order. This means that for some existing structures, performance has improved compared with the deteriorating conditions seen in 2007. Falling unemployment rates and a more aggressive stance against voluntary personal insolvencies paved the way toward improving performance for the average U.K. borrower.

Total insolvencies have decreased over the past two quarters, according to Merrill Lynch. As of 3Q07, they have fallen 3% compared with the previous quarter and are 6% lower than a year ago. The insolvencies have also dipped 13% since the start of the year. Individual bankruptcies have dropped 3% quarter on quarter and 6% since the start of the year, but are still 2% up from last year's numbers.

Merrill Lynch analysts said that there is a very high correlation between insolvency numbers and credit card performance. Whether the correction continues in 2008 will depend on how borrowers react to increasing pressure caused by the difficulty in mortgages. The consensus among many market analysts is that borrowers will first default on unsecured debt rather than face the outcome of losing a home, which could, in the short term, lead to a pickup in personal insolvencies and thus a return to a deterioration in credit card performance.

Headlines at the start of the year were steep with talk that significant numbers of U.K. borrowers are using credit cards to meet monthly payments. These do not bode well in these uncertain times and further point to a return to a poor credit card performance.

"U.K. headlines paying the mortgage by card' have not assisted sentiment in one of the few sectors suffering weak credit performance," SocGen analysts said. "Excess spread remains of concern to us for many transactions, especially Egg's Pillar transactions, now ultimately sponsored by Citigroup."

However, the Pillar trust reported the largest decline in delinquency rates of 0.9% since the end of the second quarter, after Egg chose to buy back GBP127 million of delinquent accounts from the Pillar trust on Nov. 20, 2007.

The charge-off index has dipped as well. Market analysts said the decrease in charge-offs is related to a pronounced drop in the charge-off rate for Barclaycard's Gracechurch trust, following the policy change made by the credit card firm. The modification involves the treatment of accounts on repayment plans where accounts paying less than 1% would not automatically be written off if they were current. Also, all accounts on a repayment plan paying above 1% that are not paying as agreed will be reported as delinquent.

"The change was made to more accurately reflect the flow from delinquency to charge-off," Merrill Lynch analysts said. "Arran reported the highest increase, and only the Sherwood and Pillar trusts registered a fall in charge-offs from the previous month." Arran is a Royal Bank of Scotland trust, while Sherwood is Capital One's.

But some transactions are sill feeling the pinch. Fitch Ratings last year changed the outlook of the most junior notes of MBNA's CARDS I and CARDS II master trusts from stable to negative, based on the trust performance and the MBNA debt management strategy. Not unlike other lenders, MBNA has a policy that allows some borrowers to freeze their balances and repay their debt without any interest or fees based on lower minimum monthly payments than they otherwise would pay. This policy could lead to underreported levels of arrears and charge-offs by the master trust. Fitch also reviewed its outlook of the Cumbernauld 3 Class A notes AAA' from stable to negative following a review of its performance.

This year the market should expect minimal volumes from the credit card sector, with reduced lending appetite and perceived risk putting a downward pressure on supply and demand. "Our house view is that the European and U.S. economies have not decoupled; therefore, we would expect pressures faced by U.S. consumers to be similar to those experienced by Europeans," RBS analysts said.

Merrill Lynch analysts also said that, in 2008, they expect credit card and unsecured consumer loan ABS issuance to remain minimal, while auto loan ABS issuance should still provide some volumes, with the addition of student loan ABS. They estimate that combined issuance from these four sub-asset classes should stay in the 15 billion area.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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