As participants in the credit card ABS market anxiously watch trust performance in the wake of the recently enacted bankruptcy reform, several credit card issuers have given guidance on where they think charge-offs are headed. For now, the consensus still seems to be that the trusts will experience an increase in chargeoffs through the end of the year, followed by a return to normal levels in 1Q06. Meanwhile, issuers, analysts and rating agencies alike still believe most trusts have adequate excess spread to absorb the spike in chargeoffs.
The Bankruptcy Reform Act, which became effective last month, has made it more difficult for consumers to escape their debts by filing Chapter 7 bankruptcy. The law has caused record bankruptcy filings in advance of the deadline, which are expected to impact chargeoffs in the coming months.
Morgan Stanley's Discover Bank, in a filing last week, acknowledged it has received a spike in bankruptcy notices as a result of the bankruptcy reform that became effective on Oct. 17. The bank said it expects a decline in group excess spread in the near term, but "does not expect that an amortization event will occur with respect to any outstanding series of the Trust certificates." Excess spread is expected to remain positive on a three-month rolling average basis and is expected to recover after December, by when bankruptcy filings are expected to have returned to normal levels and by when previous filings will likely have been fully recognized. Discover reported chargeoffs of 5.50% for the September period, so far consistent with numbers in recent months.
Discover also announced it is retiring its $4 billion Newcastle commercial paper program, Series 2000-A. The move "will cause $4 billion in funds from October 2005 collections to pay principal on the Series 2000-A certificates at their maturity, beginning Nov. 15." The company said the allocation of funds will not affect payments of principal or interest payable on any other series.
Moody's Investors Service put out a notice last week affirming the strong liquidity profile of Morgan Stanley, Discover's parent, and the "solid regulatory capital position" of Discover, saying those will allow the company to handle the liquidity and capital demands of absorbing $4 billion of additional receivables for a short interim period as a new securitization is arranged. The move is seen as a preemptive maneuver by Discover to avoid a potential violation of the conduit's 2% excess spread provision. One ABS analyst said the decision is actually a positive for the issuer's term ABS, as it means the term deals will not suffer from having to provide excess spread to the conduit.
Citibank, N.A. also last week said that its Citibank Credit Card Mast Trust I is expected to face increased net credit losses for October and November. The company reported one- and three-month excess spread for October is expected to be approximately 2.24% and 3.74%, respectively. "Based on currently available information, we expect such increase in net credit losses to have no effect on the payment of principal of, or interest on, any outstanding asset-backed securities issued by [CCCMT I] or Citibank Credit Card Issuance Trust," according to the company. Both trusts reported 5.30% chargeoffs for September, also in-line with numbers over the past two months.
Meanwhile rating agencies and banks still report that credit card trusts are in good shape. Standard & Poor's last week said it expects the jump in loss rates due to increased bankruptcy filings will be limited to 4Q05. S&P expects industry average loss rates to increase during the October to December period by 25% to 40%, which could result in industry average loss rates in the range of 7.50% to 8.50%, as measured by S&P's Credit Card Quality Index.
S&P notes that a combination of factors, including increased monthly payments, increased funding rates brought on by higher short-term interest rates, as well as some consumer displacement from hurricane related damage, is expected to cause a 2% to 3% excess spread reduction during 4Q05, bringing those levels in the 4% to 5% range. Excess spread averaged 7% in the first nine months of the year, and is expected to return to a 6% to 6.50% range in the first half of 2006. S&P said "excess spread levels are expected to remain healthy, adequately protecting investors against losses."
Deutsche Bank Securities analysts further posit that excess spread levels within the industry in general will be adequate to protect investors. "Given the heftiness of current excess spread levels, we expect that most credit card trusts will easily avoid amortization," wrote the analysts in a report last week.
Deutsche Bank notes one deal that could be in trouble once filings are tallied is the Fleet Credit Card Master Trust II series 2001-A. The trust has shown higher than average losses and lower than average excess spread levels. Chargeoffs for October are at 5.59%, a two-year low, while chargeoffs for the trust have averaged 9.02% between October 2004 and September 2005, which is 300 basis points higher than the average industry prime chargeoff rate of 6.02%.
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