Both Standard & Poors and Fitch have recently unveiled corresponding credit card indexes to monitor what has so far been the steady performance of European credit card securitizations.
"With last week's release of European credit card indexes from S&P and Fitch's announcement to soon follow suite, it appears that European (including the U.K.) credit card ABS has finally reached the critical mass necessary to be considered a benchmark ABS sector," reported Chris Ames at BNP Paribas.
To date, the U.K. has dominated credit card securitization activity with only one other deal emerging from continental Europe. The growth of the market has happened over the last 10 years, with record growth recorded in 2000 and 2002. According to the Fitch indexes, the U.K. credit card market has seen spending triple from the £25.3 million recorded in 1994 to £61.4 million year-to-date.
So far this year, four deals have been completed. The latest is another transaction from Internet-based Egg Bank Plc, which priced its second deal from its Pillar Master Trust last week. The deal offered three triple-A tranches and priced each one at 25 basis points over the three-month Euribor for the Euro tranche and 25 over Libor for the sterling and dollar tranches.
Key findings highlighted in the Fitch index show charge-offs have steadied to a level between 4.0% and 4.5%. The overall yield, incorporating the interest charged to cardholders and fees, has also leveled to around 20%, and monthly payment rates have remained flat at 16%. Fitch will publish its report on a quarterly schedule based on the 19 transactions the agency has rated to date.
S&P's index will likewise monitor the performance levels of the 31 European credit card transactions the agency has rated dating back to 1995. Preliminary data from its index indicates that there have been no defaults or rating downgrades to date. According to the index, delinquency and charge-off rates are lower in European portfolios when compared with U.S. key indicators, and the yield levels are comparable, resulting in higher excess spread in Europe. Excess spread was 10.63% in Europe and 6.9% in the U.S.
"This comes as no surprise: substantial credit card borrowing is a more recent phenomenon in the U.K., and therefore defaults are lower," Ames explained in a commentary on the sector. "As long as portfolio yields remain at similar levels and defaults lower in the U.K., then U.K. spreads will be greater."
A trend evident in recent transactions, such as the latest Pillar deal, is the inclusion of dollar-denominated notes backed by U.K. receivables. Market sources explained that U.K. collateral offers significant value over U.S collateral. According to BNP figures, credit card transactions denominated in U.S. dollars have increased from 19% to 36% recorded in 2002.