The U.K. continues to dominate European credit card ABS, with only one or two deals done on the continent so far. At the moment the only buzz of mainland activity comes from Greece, where a deal backed by credit card receivables is due to close in July.
There is huge potential growth in Continental Europe - but the question is, is that growth likely? The large cultural divide between continental Europe and the U.K. in credit card usage has yet to be bridged. And though some countries, like Spain and Italy, have worked to change this mentality - it's not clear how fast this change will transform the market.
The revolving nature of the pools has held back widespread acceptance. It's not easy to have central bank officials in a given country grasp how these deals function or to have local lawyers confirm whether domestic law supports true sale of revolving credits. "In the U.K. these issues have been settled through common law and explicit FSA securitization rules," explained Debashis Dey, a partner at Clifford Chance. "We believe, however, that once Basel II is implemented, the explicit description of revolving credits will greatly help the situation in new jurisdictions."
But even under proper legislation, players still need a critical mass of receivables to do these deals. Even in the U.K., issuers face stalled consumer spending, which in the long run could spell smaller pools of securitizable assets.
By this time last year, U.K. credit-card ABS was well underway with at least two or three master trust deals closed. This year, only one deal has closed so far. "There is currently a consumer slowdown and in the U.K. and I think both arrangers, investors and originators were spoiled there for a while with the volume of issuance," said Dey. "Now credit cards companies, particularly monoline issuers, must focus on finding other business while consumer spending slows."
According to the latest quarterly report on its U.K. credit card indices from Moody's Investors Service, the performance of U.K. securitized credit card receivables deteriorated markedly during 1Q05. The aggregate U.K. credit card payment rate - the primary indicator of borrower quality - fell to 16.8% in March, after reaching an index high of 20% in March 2004. A tight labor market and historically low interest rates supported healthy, albeit declining, payment rates in 2004, with the 1Q05 average of 16.24% constituting a 1.11-point decline from the 1Q04 average rate of 17.35%. Moody's observed that the slowdown in the payment rate may be an early indicator of negative performance trends.
In March 2005, the aggregate chargeoff rate increased to 4.65%, its highest level since March 2002. Chargeoffs have increased sharply since last December, after a sustained period of decline during 2004, and the 1Q05 average rose to 4.43%, compared to the corresponding 1Q04 figure of 4.09%. The increase in chargeoffs may be indicative of an imminent negative trend in performance but Moody's noted that although the index reflects some negative developments, not all trusts have shown performance deterioration.
On the contrary, despite the marked rise in delinquencies, most trusts continue performing in line with expectations. "When you look at the transactions themselves, the broader macroeconomic outlook is still supportive of consumer credit fundamentals, unemployment is still quite low and unless we see a rise in that, I think most people will still be able to make their payments," said Paul Geertsema an analyst on the securitization research team at Barclays Capital. "European credit card ABS remains relatively robust."
Geertsema said that U.K. issuers might not be aggressively pursuing securitizations today because most players took advantage of low spreads in 2004, and did the funding they wanted done in ABS. Typically 25% to 35% of U.K. credit card companies' funding is done through the securitization market. The rest is done via warehouse facilities with other banks, corporate bond issuance or, increasingly, via consumer deposits, he said.
Although U.K. market issuance is likely to be muted this year, the desire to keep the market alive should compel a number of the master trusts to launch new deals in 2005. Barclay Card earlier this month issued a $1.5 million deal from its Gracechurch master trust in the U.S.. "U.K. credit cards have high [portfolio] yield, which has been supported by interest rates in the U.K. where rates have climbed, not declined," added Dey. "If in future issuance, spreads on the bonds climb because investors demand it in order to renew, one effect we'll see is higher interest rates on the bonds with lower amounts of excess spread on the deals but it will still remain compelling for the originators."
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