Moody's see rough road for credit card sector

NEW YORK Oct 17 (Reuters) - The U.S. credit card industry is bracing for an exceptionally challenging period ahead as write-downs of uncollectable debt increase amid a deepening worldwide economic crisis, according to Moody's Investors Service.

Moody's key credit card index, which tracks performance on over $435 billion of U.S. bank credit card loans supporting securities rated by the agency, showed a deterioration across all key metrics for August, the ratings agency reported late on Thursday.

Moody's charge-off rate index, which measures the write-down of uncollectable debt by firms, rose to 6.82 percent in August, up 48 percent from 4.61 percent a year ago. The latest rise marks the 20th consecutive month of year-over-year increases and is on track to surpass peak rates following previous recessions, said Moody's.

Credit card delinquencies of 30 days or more rose to 4.60 percent in August, from 3.83 percent a year ago. Cardholders paid back 13 percent less on their credit card bills in August. The payment rate fell to 17.40 percent from 20.07 percent in the same year-ago period.

The excess spread index, which measures the yield after the expenses of the related securitized transaction, is a key gauge of collateral performance to investors of bonds backed by credit card receivables, and serves as the first line of defense against default in a structured finance transaction.

Moody's excess spread index measured 6.12 percent in August and is expected to erode further in 2009.

"This is essentially bondholders' first line of credit protection. For virtually all credit card ABS, if the three-month average excess spread falls below zero, then the related bonds begin to amortize ahead of schedule," Moody's said.

Moody's currently maintains a negative outlook on the credit card segment and expects deterioration to persist through 2009 as the economy and credit markets continue to deliver bad news for the consumer sector.

The rating agency highlighted key macroeconomic indicators of consumer performance, like consumer confidence and retail sales, that are worsening. The unemployment rate, one of the biggest economic drivers of credit card delinquencies and charge-offs, is now at 6.1 percent -- the highest it has been in nearly five years, it noted.

It noted that Moody's Economy.com forecasts further increases in the unemployment rate, estimating it will peak the fourth quarter of 2009 at about 7.3 percent. Such an increase would boost the level of charge-offs to an estimated 8.5 percent, well above the 7.1 percent post-recessionary peak in May 2003, it said.

Adding to the pressure is the sustained credit crunch that has constrained some issuers' access to funding. Issuers that rely on continued access to the capital markets have become subjected to significantly higher spreads, tighter terms and lower investor demand, if able to access the market at all.

"Although the balance sheet strength and liquidity of the sector's largest credit card issuers remains quite strong, the uncertainty and tempo of the turmoil will test even the stalwarts' ability to adapt," warned Moody's.

Compounding the situation is the narrowing over recent weeks in the basis risks, the difference between the prime rate and the London interbank offered rate.

"This has emerged as yet another significant challenge for issuers as most issuers' card portfolios are priced off of prime, while most securitized notes are priced off of Libor," said Moody's, noting a material narrowing of 2.50 percent in recent weeks.

"Ironically, the Fed's recent move to ease interest rates by 50 basis points, and indirectly lower the prime rate by the same, may only exacerbate this problem so long as Libor remains unusually high," said Moody's. "If the trend continues, excess spread margins for credit card trusts will be significantly and suddenly reduced in the coming months," it said. (Reporting by Nancy Leinfuss; editing by Leslie Adler)