Credit card repayment plans can prove problematic in securitization transactions backed by credit card receivables in certain circumstances, Moody’s Investors Service said today in a special report that focuses on the U.K. credit card market.

These could potentially result in distorted performance-related ratios and understated charge-off levels.

"Credit card issuers may offer repayment plans — or debt management programs — to borrowers facing difficulties keeping up with their credit card repayments,” explained Cher Chua, a Moody's assistant vice-president. “A repayment plan relieves some of the financial stress faced by certain cardholders by reducing their required monthly payment. Interest and fee charges are typically also suspended on repayment plan accounts."

Monthly settlement reports might not capture the true condition of a trust because it can be difficult to understand from the information provided the amount of receivables in repayment plans, their new payment obligations and the treatment of these receivables.

Specifically, Moody's believes that, depending upon the growth in receivables under these plans and the method of reporting chosen by the originator, the reported level of trust charge-offs could be understated and series excess spread levels overstated.

Moody's has been requesting data that would enable it to monitor the effects of these debt management programs across the U.K. credit card trusts. The agency has formalized this data request list with a view to obtaining regular and detailed information from individual master trusts that would allow for better monitoring of the impact of repayment plans on the ratings of credit card receivables-backed notes

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