Since the passing of the UK’s Enterprise Act in April 2004, UK bankruptcies have doubled and individual voluntary arrangements (IVAs) – whereby borrowers can enter into a formal arrangement with their creditors – have risen fivefold. This is now becoming uncomfortably clear in the credit card ABS sector where charge-off levels were up from 4.72% in June 2005 to 7.04% in June 2006 according to S&Ps European Credit Card indices. Excess spread in these deals is trending commensurately downwards, from 7.13% to 6.31% over the same period.
When Moody’s placed the Class C notes of Egg Banking’s Pillar Funding on negative watch at the beginning of August it seemed that the consumer credit chickens were coming home to roost. The bid spread on the bonds immediately shot up from 60 basis points to 75bp. It has, however, subsequently emerged that incorrect accounting treatment of certain loans triggered the move, and Moody’s drew much criticism for not making this clear at the time. Pillar’s delinquencies and charge-offs remain below the industry averages when compared on a like-for-like basis.
But several credit card trusts have now breached their charge-offs base case and delinquencies are rising. The decision by the Bank of England to increase base rates by 25bp to 4.75%