Bonds backed by credit card receivables can weather further deterioration of consumer credit even though personal insolvencies are already at record levels, two credit rating agencies say.
More Britons than ever found themselves unable to pay back their debt in the first quarter of 2006, as the nation's 1.0 trillion pound household debt mountain claimed more victims.
Consumer insolvencies in England and Wales soared 73 percent to a seasonally adjusted 23,351 during January to March period against the same period of 2005.
Fitch Ratings says the credit card industry is in a stressful environment, given an increase in card charge-offs. A charge-off occurs when the issuer decides the debt is unlikely to be paid and considers it a loss.
But Fitch also says investors in credit card bonds are still well protected thanks to a structural feature called excess spread - the cash cushion in an asset-backed security that protects investors from losses when assets in the pool backing the bond default.
"The performance of the credit card sector would have to deteriorate substantially more from current levels before excess spread can be exhausted," Fitch analyst Janet Oram told Reuters this week.
"Currently, excess spread is running at an average of around 7 percent. This level is after charge-offs have been covered," Oram said. 
Standard & Poor's said it expects lenders to tighten credit standards, thus improving the quality of credit card receivables.
"We expect to see a stabilisation in household debt and more conservative unsecured lending criteria, triggering a flattening in delinquency and charge-off rates,"
said S&P analyst Alice Keegan.
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Britain is virtually the only supplier in Europe of credit card receivables for securitisation in the ABS market: S&P says 99.6 percent of its European Credit Card Indices by volume is made up of UK issuers.
Such bonds can function as an early warning system for consumer credit quality in the UK.
"Typically, credit card repayments rank below other forms of financing in a borrower's priorities since there is no security attached," Fitch said in a report last week. "This means that any consumer downturn is likely to be seen in credit card trends before other forms of financing such as auto loans and mortgages."
HIGHER PAYMENT RATES
S&P's Keegan pointed out that card payment rates in the pools backing credit card ABS have actually increased over the last 12 months, even though credit card delinquencies and charge-offs reached record high levels of 6.16 percent and 6.68 percent respectively this week in the agency's own credit card indices.
Keegan said she has seen some individual credit card deals suffer considerable decline in excess spread due to the consumer credit decline in the UK.
HCF Bank's card receivable securitisation via the Affinity 001 vehicle has seen its three-month average excess spread more than halve to 2.42 percent in March 2006 from 5.27 percent a year ago, she said.
Nevertheless, Keegan said her agency has barely seen any change in the overall excess spread level in the credit card backed bond sector. The S&P excess spread index was 7.46 percent in March 2006, identical to a year ago, and up from 6.24 percent in December 2005.
But she said the index has been predominantly trending downwards on a 12-month rolling average since its inception at the start of 2000. This trend has continued over the past 12 months but at a greatly reduced pace.
But S&P said it does not expect the credit card industry to deteriorate much further, and it expects most issuers in the sector to withstand some further consumer credit decline with protective measures in place such as excess spread.
UK card bonds still command a relatively small share of the ABS market in Europe. Data from industry lobby group the European Securitisation Forum this week showed that credit card bonds made up just 2.4 percent of new issues, at 1.56 billion euros, for the first quarter of 2006.
Source: The Scotsman
