Although chargeoffs and delinquencies are nearing their three-year highs, U.S. credit card ABS continue to generate robust levels of excess spread, according to Fitch Ratings.

Excess spread is a measurement of the extra cash flow generated by securitized credit card receivables and is a barometer for the health of credit card transactions. Fitch's Prime Credit Card Index for March 2008, which aggregates trust performance through the end of February, reports three-month average excess spread at 7.56%. Excess spread has hovered around this 7.5% level since the second quarter of 2006; prior to that the excess spread level averaged approximately 6.5%.

Since the implementation of the Bankruptcy Reform Act in October 2005 (BK) and the wave of filings that immediately preceded it, the credit card sector has experienced abnormally low chargeoff and delinquency rates. After two-and-a-half years, those rates have begun to approach historically observed levels. The Fitch prime chargeoff index reached 5.73% in March, compared to pre-BK average levels of around 6%. Chargeoffs have climbed 100 basis points (bps) over the last six months, coincident with the economic stress which is affecting the performance of all consumer ABS. Delinquency levels are also elevated and have rebounded to pre-BK levels. Year-to date bankruptcy filings have increased 27% over 2007, but the volume of weekly filings remains at least 30% below pre-BK levels.

Currently, excess spread on credit card ABS has been bolstered by the drop in LIBOR rates. The coupon on most credit card ABS is based on one-month LIBOR, which has experienced a 250bp drop over the last six months. Therefore, the effects of slightly lower yield and higher chargeoffs are being offset by lower borrowing costs, keeping excess spread steady. Yield reduction has remained modest as well, as card issuers have proven adept at managing their yield through pricing initiatives and dynamic strategies implemented to reflect changes in card usage over time. As a result, although the prime rate, which drives cardholder interest rates has been lowered by 200bps since the beginning of the year, yield reduction on credit card ABS in March 2008 was only 36bps lower than the average for the 2007 calendar year. Yield comprises collected finance charges, fees and interchange revenue.

Fitch continues to expect chargeoffs and delinquencies in the prime credit card sector to climb throughout 2008, with chargeoff levels around 7% expected by year end. However, transactions are expected to continue to perform within expectations with limited anticipated ratings volatility due primarily to the significant credit enhancement and structural protections inherent in these deals.