Following Moody's Investors Service (ASR, 08/21/06) decision to place most of the junior classes issued by Egg Banking's Pillar Master Trust on review for downgrade, Fitch Ratings and Standard & Poor's have been slower to react. The rating agencies announced in the last week of August that they did not intend to take any immediate ratings action.

S&P put out a press release recently stating that no rating action is currently required on the class A, B, and C notes in five U.K. credit card-backed Pillar Funding Series transactions. The agency has conducted a full cash flow analysis of the deals to assess the impact of Egg's reduced minimum payment plan and has found the ratings of all classes to be consistent with the current levels.

Since June 2005, Egg has offered certain borrowers a reduced minimum payment plan amortizing over 10 years and paying no interest or fees. The minimum payment for accounts in this plan is 0.833% of the principal outstanding per month, or 10% annually, compared with the standard minimum of 2%. Moody's stated in August that this arrangement could possibly lengthen the period of time an account remains in delinquency and artificially deflates the level of charge-offs for the trust portfolio. No interest or fees are charged on the principal balance. Moody's believes that if borrowers have not paid at least 2% of outstanding balances for over 360 days, then they should be considered nonperforming.

S&P's viewpoint

But after reviewing the transaction information, which included data from Egg on the value of rescheduled accounts both historically and currently on their balance sheet, S&P has decided no rating action is required. S&P said that the rescheduling of the delinquent accounts has a number of differing and counterbalancing effects on the trust performance indicators. S&P said that it was comfortable with the trust's credit profile following a cash flow and stress rerun that took into account the value of rescheduled accounts, which Moody's originally blamed for its negative rating action.

"The most pronounced of these is an understatement of charge-offs and an overstatement of reported excess spread," said S&P credit analyst Alice Keegan. "However, it also dampens both the yield and the payment rate. Although the overstatement of the excess spread renders the spread trapping mechanism less effective, if we give no benefit to this mechanism in our model and conservatively model what the base cases would have looked like had this rescheduling not occurred, the transactions still pass the various cash flow runs at the current rating levels."

According to the S&P analysis, each of the Pillar Funding Series transactions currently has 1.5% trapped in a spread account to provide support to the class C notes. Analysts noted that if the volume of rescheduled accost grows to unsustainable levels or if additional issues are uncovered as more information comes to light, these factors would cause some concern.

And Fitch says...

Fitch says the changes to delinquent account management at Egg are a potentially significant modification to the profile of the credit card portfolio. The agency is awaiting additional information to enable it to perform further detailed analysis.

Under the revised debt repayment schedule, customers will still roll through to delinquency and charge-off if they do not meet the 0.833% monthly payments. And like Moody's, Fitch has stated its concern that such a mechanism can artificially reduce charge-off levels and therefore increase excess spread in the asset-backed transaction, which would render the trapping mechanism less effective.

"Fitch was informed of this change in account management early in 2006, but was led to believe that it was only being used on a small number of accounts in the later stages of delinquency," Fitch analysts explained. "More recently, Fitch has been informed that accounts in all stages of delinquency and in rare cases, also non-delinquent accounts are eligible for the revised payment scheme."

Egg will continue to provide the rating agencies with further information on these accounts and their effect on the trust's performance towards the end of this month.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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