Additionally, chargeoff rates in Fitch's prime credit card index have risen for the ninth straight month, up 40% on a year-over-year basis, with chargeoffs reported in their subprime and retail indices exhibiting similar trends. Fitch expects chargeoff rates in the prime credit card segment to approach the high end of historically observed performance averages, meeting or exceeding 7% by year end. Of equal concern are the monthly payment rate (the ability of a borrower to repay their credit card debt) and gross yield (the rates and fees which banks charge borrowers), both of which are also showing signs of deterioration. ABS transactions financing credit card receivables rely on the combination of these three metrics to generate extra cash flow, or excess spread, to support the deal.
To date, excess spread levels have decreased by 4% in the prime index and 42% in the subprime index on a year-over-year basis. While spread levels remain sufficient enough to maintain current rating levels on senior debt, Fitch reports that this continued compression could begin to put pressure on subordinated debt ratings. "Coming off a two-year period of exceptionally strong performance following the Bankruptcy Reform Act of October 2005, card portfolios still have some cushion before breaching historical performance levels," said Managing Director Gary Santo, "However, economic pressure, increased borrower debt reload rates, and lack of alternative debt refinancing options are steadily chipping away at that cushion."
