In anticipation of a downturning economy, shifting tides in consumer credit were of growing concern for the asset-backed market toward the end of 2000.

Going into the new year, analysts at Merrill Lynch are calling for "moderately higher loss and delinquency levels" in prime collateral, and "more significant deterioration" in subprime collateral.

It is only a matter of time before the problems corporations have experienced work their way to the consumer, impacting securities backed by consumer loans, analysts said.

"The last time we really had an economic slowdown that affected the market was during the 1990-1991 recession, and we did see loss and delinquency numbers go up, but they only went up a little bit," said Dan Castro, ABS strategist at Merrill.

During the 1990 recession, delinquencies increased 20% to 30% from where they were, Castro said. Given the current rough landing view (as opposed to a full-blown recession), Merrill expects an even softer rise in delinquencies, which could start showing up toward the end of the month, or later into the first quarter.

Meanwhile, Standard & Poor's Ratings Services said last week that bank credit card delinquencies were up four basis points to 4.64% in November, and up 55 basis points compared to 4.09%, just six months earlier.

While the average charge-off rate decreased from October to November, analysts are anticipating an uptick going forward, as delinquencies tend preempt charge-offs.

The flipside of slowdown

Though portfolio performance on the consumer side is at issue, problems in the corporate market could continue boosting asset-backed issuance and investor interest, as seen during the second half of 2000.

"The benefit of securitization versus unsecured funding is going to drive large financial institutions, at least for the first two quarters of the year, into the securitization market," said William Grady, managing director and co-head of global ABS at Salomon Smith Barney.

"My own outlook, for the largest credit card and auto companies, is that we're actually going to see significant volume increases in the first and second quarter," Grady added. "Beyond that it's really going to be a question of what happens to spreads in both the unsecured and the securitization markets."

According to Merrill's Castro, a few developments could follow this migration to the securitization market. For one, if spreads in the corporate market blow out far enough, investors could regain interest, thus dampening the recent robust demand seen in the ABS market. Similarly, too much supply in the ABS market could squeeze out the cost benefit of issuing into the ABS market.

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