Analysts at Standard & Poor's say they expect to see more from the credit card sector during the second half of 2006. However, the continued deterioration within existing card deals is starting to exert pressure on ratings. Lackluster new issuance in the beginning of the year also has several market participants doubting whether the sector can recover in 2006.
"The pipeline looks healthy," said Andrea Quirk, an analyst at S&P "We've already seen new issuers in the market and in the second half of the year we are expecting more de-linked structures being used." In other corners, the prognosis is not as optimistic.
In a commentary on the sector, Ganesh Rajendra at Deutsche Bank stated that the credit card ABS market in 2006 would be characterized by the dearth in primary issuance. No new issues have come to market since HSBC's balance sheet print issued last June. According to Deutsche Bank, U.K. underlying credit card balances posted 1% year-on-year growth recently. This is a reflection of the weaker consumer credit appetite driven by the higher APR rates as well as the more stringent underwriting criteria adopted by many lenders.
"The lack of origination volumes and limited trust refinancing needs explain the dearth of credit card ABS issuance, in our view," Rajendra reported. "With neither of these factors likely to let up in the coming months, we expect a lackluster year in terms of issuance volumes in 2006." Year-to-date volumes at the end of July stood at 2.2 billion ($2.8 billion).
Source of weak performance
Up until now, the risks associated with weaker performance seen across credit card trusts has been mitigated by the protection offered through excess spread trapping as well as other structural triggers. But analysts at Deutsche Bank believe that if deterioration in trust credit quality continues, it will make the seller's ability to support deals a more important consideration and could eventually impact the seller ratings.
Capital One last week reported second quarter profit below consensus expectations because of a sharp rise in defaults in its U.K credit card business. Although net income rose 4% to US$552.6 million, the CEO said there had been rise in insolvencies in the U.K. that has led to an increase in reserves and write-downs. Moody's Investors Service last week placed the Class C notes from each of the five series issued by Egg's Pillar Master Trust on review for possible downgrade. Moody's attributed the move to the present and anticipated future growth in delinquent receivables. It's the first transaction to be the subject of a rating action.
Sarah Barton at Morgan Stanley reported that deterioration in existing credit card transactions resumed in June. Delinquencies for the Royal Bank of Scotland's Arran, MBNA's Cards and Capital One's Sherwood trusts rose marginally in June. Arran showed the largest increase, up 0.17% to 8.47%. Default performance were also mixed with Sherwood and HFC's Affinity trusts seeing charge-offs rise to 9.08% and 7.43%, respectively, while the remainder reported a fall. Payment rates and yields were mixed across the trusts, with Capital One the only issuer to report gains in both. As a result, excess spread fell again.
"The credit deterioration in U.K. credit card ABS trusts over the past year is near alarming, and certainly without precedent," Deutsche's Rajendra said. "In its recent quarterly Financial Stability Report, the Bank of England cited the increasing indebtedness of non-home owning borrowers and the more relaxed attitude towards bankruptcy as key factors driving unsecured credit impairments to record levels. We have articulated the same reasoning over the past year, and are of the view that credit card portfolios are likely to remain vulnerable over the foreseeable future."
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