With deterioration continuing among U.K. credit card trusts, market players are expecting more deals to follow Barclaycard's GBP111.8 million ($211.8 million) subordinated multi-tranche issue that supports its GBP8.2 billion Gracechurch Card Funding Trust, the first publicly rated double-B U.K. credit card ABS. Capital One executed a similar transaction earlier this year, but the double-B tranche was privately placed. The Barclays financing will provide an additional 2% hard credit enhancement to outstanding Barclaycard notes.
Moody's Investors Service released U.K. credit card indices for May 2006. The rating agency noted the continuing deteriorating trend throughout the various U.K. credit card securitization trusts since the beginning of the year. The high level of charge-offs continues to have a negative effect on excess spread, which showed a significant deterioration from the relatively stable levels observed in 2005.
According to the data collected by Moody's, charge-offs rose to 6% from 4.62% a year earlier, while the three-month average excess spread was down from 7.13% in May 2005 to 6.18%. Moody's says it is assessing the entire credit card sector and this may result in requests for further credit enhancement to support current ratings and could also lead to rating actions for some trusts in the coming months.
Fitch Ratings also issued a special report last week with similar findings, albeit with a more positive outlook. The second quarter of 2006 was marked by further increases in charge-offs across U.K. credit card trusts. Fitch's charge-off index broke through the 7% barrier for the first time to reach 7.04% in the final month of the quarter. Analysts at the rating agency said that most originators continue to consider a softening in the credit card market likely, but are unable to predict when this will occur and the extent of any recovery. "This latest report shows losses continuing to rise across the credit card industry but excess spread for most transactions is holding at a fairly reasonable level," said Heather Dyke, senior director with the consumer ABS team.
"The upcoming Barclaycard double-B issue suggests that additional hard credit support has been deemed a requirement to preserve the credit / rating profile of the outstanding bonds," Deutsche Bank analysts said. "But while credit trends have unmistakably deteriorated in the U.K. credit card ABS market, trust performance versus base case scenarios paints a more mixed picture." They added that charge-offs look weak compared to Standard & Poor's base case, with Barclaycard one of the underperformers. Although trust yields are comfortably above base case, payment rates are generally at or moderately better relative to the base case.
Taken as a whole, trust performance versus the base case does not look threatening from a rating perspective. However, rating agencies are still taking a much closer look at the sector. "And if we assume that BCARD has come under scrutiny, selected other trusts (most noticeably ARRAN) are also likely to be red-flagged," Deutsche analysts said.
Case in point: a week after Barclays had announced its deal, Capital One launched its public double-B rated series that will enhance subordination in U.K. master trusts. "Egg's performance improved this month, with charge-offs falling from 4.04% to 3.15%," reported Sarah Barton at Morgan Stanley. "Interestingly, delinquencies were constant on the month at 7.86%. While it is impossible to make a performance comparison across trusts, a downward trend for charge-offs is favorable."
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