European consumers may be feeling the stress that comes with interest rate hikes, but at the moment, it has not translated into any immediate effect on the performance of credit card securitization portfolios. In a seminar on the sector held last week, Fitch Ratings said that even for subordinated bonds, transactions still had some time before breeching default breaking points.
"Securitized credit card receivables are a popular asset class in Europe and this trend is expected to continue in 2005," said a Fitch analyst speaking at the seminar. "Tighter spreads have encouraged investors to move down the ratings scale." The analyst added that spreads for card assets were at 20 basis points over Libor in 1995 when Fitch began rating the asset class. Today spreads have moved in to 10 basis points over Libor, making it more challenging for investors to get some arbitrage on credit card deals.
But the challenging economic scenario might be of concern for investors looking further down the credit curve - triple-B credit card ABS rely on excess spread as credit enhancement and are much more vulnerable to performance volatility. At the moment, said analysts, excess spread levels remain comfortably above trigger levels showing resilience to the four successive interest rate hikes administered by the Bank of England.
Fitch's credit card indices indicate that both charge-offs and delinquencies as a whole have fallen and remain relatively stable over the past three quarters despite the rising rates. Fitch said that the current performance variables are in-line with or exceeding base case assumptions. While levels won't likely maintain the same performance charted in 2004, it is likely to remain within the agency's base case assumptions. Fitch concluded that the current interest rate environment did not challenge the ratings, given these underlying assumptions.
One topic that still shadows projected performance levels is the ruling against interchange fee charges by the U.K. Office of Fair Trading (see ASR 12/6/04) might impact yield performance. "The yield could come down significantly both in the U.K. and Europe at large and OFT is also looking at finance charges and late fees charged to customers," said one analyst. "We've been in discussions with originators, who have come up with all sorts of ideas to compensate for the losses."
Growth in the credit card ABS sector continues to be dominated by U.K. issuance; year-end volume totalled GBP6 billion ($11.2 billion) in 2004, but unless European wide participation is thrown into the mix it is unlikely that volumes will surpass that level. Fitch said it was hoping to see some new jurisdictions tap the market in the coming months. Analysts at Dresdner Kleinwort Wasserstein added that some U.K. lenders - that have previously concentrated on securitizing residential mortgages - may start looking to securitize credit card portfolios, which currently totals roughly GBP6 billion.
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