Shaky economy hits credit card ABS

By Nancy Leinfuss - Analysis

NEW YORK (Reuters) - As the U.S. economy teeters on the brink of recession the credit-card asset-backed market is showing signs of stress as rising unemployment squeezes consumers further, forcing defaults on credit card payments.

Delinquencies on credit cards are rising, investors are demanding higher yield spreads for credit card-backed securities, and issuance is down as the sector's largest buyers retreat.

"This is typical borrower performance as we enter a recession. This is not a replay of the subprime mortgage disaster but the market is pricing it in that way," said Glenn Schultz, analyst at Wachovia Securities. "Underwriting in the credit card segment was much better than subprime."

Fears that the problems in the subprime mortgage market would spread to the ABS market saw spreads widen in the last year or so. Spreads rated "AAA" on three-year credit cards reached 110 basis points over the London interbank offered rate in March, after trading close to Libor a year earlier, said Schultz.

Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), one of the banks hardest hit in the year-long global credit crisis, last week posted a quarterly net loss of $176 million from securitization of credit cards, compared with a year-ago $243 million profit.

Delinquencies and chargeoffs, or balances written off as uncollectable, have both risen past historical norms.

May's charge-off rate rose to 6.41 percent from 4.68 percent a year earlier, according to Moody's Investors Service.

After the last two economic contractions, in 1991 and 2001, charge-off rates peaked at just over 7.0 percent, it said, versus an historical average of 6.0 percent.