Evidence of expansion abounded in March, as a host of economic indicators gained ground. The full-fledged recovery seemed caught in limbo due to an elusive labor market, but March’s employment number registered the largest gain in four years. Nonfarm payroll employment increased 308,000, and the economy regenerated roughly 760,000 jobs that had been lost since 2001. Further evidence of the strengthening economy came from March’s retail sales report, with retail sales jumping 1.8%, the largest increase in 12 months. However, the positive news turned the markets skittish with concern over higher inflation and interest rates in months to come.
With prospects of sustainable growth heavily dependent on continued consumer spending, ongoing positive employment news could serve as a catalyst for confidence. Nevertheless, Fitch Ratings remains concerned about the elevated levels of consumer debt, potential pressures in the labor market, the prospect of reloading, and a higher interest rate environment. From a credit quality perspective, Fitch expects consumer defaults to stabilize at elevated current levels before improving in the summer.
Prime Performance Measures
For the February collection period, prime chargeoffs spiked 30 basis points (bps). As reported by the Fitch credit card index, chargeoffs registered 6.75%, 20 bps above the level one year ago. Fitch’s 60-or-more- day delinquency index reversed ground for the most recent period, falling three bps to 3.35%. Considering the recent trend of stability with respect to delinquencies, upward pressure on chargeoffs may give way in months to come.
Bankruptcy filings reported for the month of March totaled 152,567. Year-to-date bankruptcy filings were 392,023, down 1.2% from the same time last year. Despite a record level of bankruptcy filings in 2003, Fitch expects bankruptcies to decrease by roughly 1%-3% in 2004 to approximately 1.59 million.
Yield, after reaching an all-time low last month, climbed 124 bps for the February collection period to 17.10%, its highest level since April2003. Approximately 90% of the index reported an increase in yield for the collection period, with First National Master Note Trust, First USA Credit Card Master Trust, and Bank One Issuance Trust exhibiting the largest increases.
On the other hand, monthly payment rate (MPR) fell for the first time since December, led by Citibank Credit Card Master Trust and Capital One Master Trust and their related issuance trust vehicles. Fitch’s MPR index slid 64 bps to 15.95%. MPR is a key performance variable in credit card securitizations, as it determines the rate at which investors will recoup their principal during an early payout period.
Prime Excess Spread Rises
Excess spread, which measures the profitability of credit cardsecuritizations, posted its first increase in four reporting periods. As measured by the Fitch credit card index, excess spread rose 36 bps to 6.41%, also 36 bps above the year-ago level. Excess spread has exhibited renewed stability lately, with levels in the past two months stronger than those of a year ago. With interest rates poised to rise in coming months, excess spread should continue to benefit.
After three consecutive months of improved performance, subprime chargeoffs reversed ground for the February collection period, climbing 64 bps to 17.27%. However, chargeoffs were 163 bps below the level a year ago, lower than prior-year results for the third consecutive month. Late-stage delinquencies (borrowers who have fallen 60 days or more past due), a measure of future chargeoffs, fell to 9.81%, the lowest level since October 2002.
With respect to early amortization cushion levels for related subprime master trusts, three-month excess spread rose 51 bps for the February collection period to 6.51%, 102 bps above the year-ago level. Fitch expects excess spread to remain under pressure throughout the first half of 2004.
New Monthly Reports on Credit Rating Actions
On March 5, Fitch introduced a new monthly report designed to inform investors about credit rating actions in the term asset-backed securities (ABS) market. Based on data collected from the current portfolio of outstanding transactions rated by Fitch, the term ABS credit action reports will present monthly and year-to-date credit rating statistics for term consumer and commercial ABS products by market sector. Rating actions discussed in the reports will include upgrades, downgrades, Rating Watch, and defaults.
In addition, the credit action reports will list current presale reports and give details about other ABS credit research. The reports also will include a discussion of rating changes from Fitch’s Corporate and Financial Institutions groups that may affect ABS. Periodic commentary on challenged deals or those on Rating Watch Negative will also appear. (For more information, see Fitch Research on “Term ABS Credit Action Report: February 2004,” dated March 19, 2004, available on Fitch’s web site at [www.fitchratings.com].)