While Fitch does not anticipate any credit card ABS Rating Watch or rating actions in the near term, last week’s terrorist attacks will have both immediate and long term effects on the sector. Near term, the events and circumstances that followed will cause additional variance in September collections that will negatively impact credit card performance statistics for the month. Specifically, the curtailment of air service and resulting FAA restrictions on commercial airlines carrying mail is expected to cause payment disruptions industry-wide for the month. Actual results will become evident in credit card ABS performance statistics covering the current collection period to be reported in mid-October. Beyond that, collection levels should normalize as backup delivery systems take effect and/or commercial airlines resume their role in domestic mail delivery.
Fitch anticipates performance results will show higher delinquencies and slower payment rates for the September collection period. Ancillary effects on portfolio yields will hinge upon whether issuers decide to waive late and other penalty fees, an action that is being encouraged by banking regulators. If such fees are waived for the period, the resulting decline in portfolio yields could temporarily pressure excess spread; although current levels (above 5%) provide investors ample protection from any risk of early amortization or credit loss.
Longer term, U.S. consumers and card performance trends could come under pressure if recent events spawn a more severe and prolonged recession than previously anticipated. Further slowdowns in consumer spending and, in turn, borrowing will compound the effects of a downturn, posing growth and credit quality challenges for even the largest industry players. The retail/private label card sectors are particularly vulnerable to such scenarios whereby declining retail sales force store closings and card portfolios begin liquidating. Also, travel rewards type cards could fall out of favor if business and leisure travel cutbacks persist, potentially resulting in slower payment rates industry-wide. Even before the attacks, U.S. consumers were feeling the strain of a slowing economy and rising unemployment. Highly correlated with employment trends, bankruptcies and chargeoffs have risen rapidly since last fall and are expected to continue higher as the labor force contracts further. Personal bankruptcy filings through August were proceeding at a record annual pace and are expected to top 1.4 million for the first time ever. Chargeoffs, meanwhile, have risen roughly 26% since last fall and are expected to test the historic highs of 6.93% by year-end 2001. Monthly payment rates, which determine the speed with which investors are returned principal during an early amortization, have held firm above the 15% threshold for much of the past three years and remain well above Fitch’s steady state level for most master trusts. Excess spread remains healthy above 5% as lower funding costs and higher fee income have offset the rise in chargeoffs.
Despite the short-term disruptions and concerns that credit quality will decline further with economic slowdown, Fitch believes credit card ABS continue to provide investors meaningful protection from credit losses. In particular, available credit enhancement and structural features embedded in credit card ABS enable the transactions to withstand multiples of historic loss levels in conjunction with severe stresses to other performance variables.