European credit card securitizations could start feeling the heat as continued economic deterioration places further performance pressure on transactions that have, until now, withstood the turmoil.
The deals have not escaped performance shortfalls during the first eight months of 2008 and Fitch Ratings said that problems have generally reversed improvements seen in 2007.
Overall, current performance levels - especially charge-offs - remain above base case expectations, as a result of the stressed environment.
Figures reported by Barclays Capital showed that performance improved in September for most trusts, with portfolio yields rising to 20.82% from 19.19% and monthly payment rates to 17.29% from 16.14%, owing mostly to extra collection days in September compared with August.
The rise in yields sufficiently offset the slight rise in charge-offs and expense rates, so excess spread went up overall to 6.78% from 5.31%.
However, Fitch said it expected future performance levels to be sensitive to the economic environment. The ratings agency is particularly concerned about the impact inflationary prices will have on household budgets, declining house prices, reduced refinancing options available to repay credit card balances, and the risk of growing unemployment. The sequence of negative events could have a negative impact on the ratings, particularly of the junior notes, of affected trusts.
As a result, all class C notes of all trusts rated by the agency have been assigned a Negative Outlook. However, Fitch believes that the junior rated notes will be able to withstand further performance deterioration, with some differentiation between trusts, depending on their excess spread trapping mechanisms.
The deterioration across the credit card sector is also unlikely to impact the global markets on the same level that subprime related downgrades have. Unicredit analysts said that while performance in the credit card sector, both in Europe and the U.S., has deteriorated, the problems are unlikely to pose another blow for the capital markets. Losses from a mark-to-market point of view are already locked in, so while downgrades on tranches will accelerate, the actual tranche losses should be limited.
"In our view, an increase in risk related to U.S. credit cards is a logical consequence of the crisis," analysts said. "Following the subprime meltdown in the U.S., borrowers' affordability is becoming more and more constrained and over-indebtedness is rising. This is reflected in worsening consumer credit performance - from subprime auto loans to subprime credit cards."
They said that considering a recession - eg. rising unemployment and inflation - this process will become even more severe. Aside from this, U.S. credit card issuers are restricting their lending criteria. For instance, American Express has already reduced credit limits on every tenth customer. The number of confiscated credit cards are increasing, which, in turn, will impact the performance data.
However, again, Unicredit analysts said it's unlikely that credit card problems in the U.S. will resonate on the same global level as the subprime mortgage credit sector meltdown. For starters, the size of the U.S. credit card market is less problematic than the volume of its mortgage sector. Its impact on the global financial environment, therefore, would be limited. Unicredit estimated that non-prime credit card ABS debt accounts for much less than $450 billion.
Credit card debt features a much lower maturity, which means that problems in the sector would not have a long-term impact, as the bursting of the mortgage market bubble has.
Non-U.S. banks are less likely to have participated in credit card investments at levels similar to subprime-related RMBS.
"In European markets, similar downside mechanisms as in the U.S. credit card market are only visible in the U.K.," Unicredit analysts said. "But the U.K. credit card business is much smaller than in the U.S., and credit standards have been stricter, with issuers already having tightened their lending criteria significantly. To date, U.K. credit card ABS deals are still performing more or less stable, although we do expect some deterioration here as well."
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