Following a less-than-stellar 2005, U.K. credit card securitization issuance looks poised for even weaker growth in 2006, as higher delinquencies and charge-offs mar the credit picture.
Analysts at Fitch Ratings last week published a report highlighting some of the key drivers of this weak credit environment, including those that shaped issuance volumes in 2005. Janet Oram, an associate director at Fitch, said that 1Q06 performance showed that delinquencies continued to rise and increased at the highest rate since March 2005. Over 2005, delinquency growth had been slowing.
In the report, Oram said these negative trends have led to breaches of Fitch's charge-off and monthly payment rate base-case assumptions in a number of transactions. The rating agency considers these to be steady state assumptions and so deal performance is expected to deviate to a degree both positively and negatively from the base case through the credit cycle and over the life of the transaction.
Feeding into the pickup in charge-offs are changes made to the U.K. bankruptcy law. The 2004 Enterprise Act reduced the discharge period for first-time bankruptcies to one year. Fitch reported that since the law changed, levels of bankruptcies and individual voluntary arrangements have surged, particularly over the last three quarters of 2005. Some of these customers would have been charged-off over a longer term anyway, but the new bankruptcy laws may have accelerated the rate of charge-offs since most credit card originators write off bankrupted accounts immediately.
The U.K. credit card industry has also endured a spate of regulatory investigations that, in some cases, has led to a restructuring of charges made by card companies to its customers. Most recently, regulators tightened their scrutiny of penalty fees. U.K. market watchdog the Office of Fair Trading issued a statement in April this year that the levels of penalty fees charged on credit cards are legally unfair and that, generally, it would not expect to see fees over GBP12 ($22.38). A calculation to derive a fairer level of fees was included in the release and issuers have until May 31 to respond.
But Oram said despite the challenging market environment overall, excess spreads remained relatively healthy and expansive enough to cover charge-offs increasing by a further 6% to 7%. "I think that performance into 2004 had been so good that it had to turn eventually," she said. "But none of these structures are anywhere near to losing the protection of their excess spread."
Where the market is headed from this point is hard to call but the pipeline is unlikely to suddenly dry up. Fitch currently sees the rating outlook as stable to negative. Issuance of U.K. credit card deals is likely to maintain a similar pace to 2005. Oram said that credit card spending continues to diminish, creating less of a need for originators to tap the market, but so far there has been no indication that they won't be back in the market.
"Whilst there has been deterioration in performance against base-case, this has to be considered in the light of the general market stress," added Oram. "The agency is maintaining a close watch on the performance of all trusts."
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