Author: Sendhil Selvaraj

Much has been made of the resilience of U.S. credit card ABS over the last four years, and today Fitch Ratings has released a new report providing a detailed analysis of metrics for the sector throughout the crisis.

Marked credit card ABS collateral performance began to deteriorate notably beginning in December 2008. Delinquencies jumped 14%, and chargeoffs soon followed suit. Credit card performance demonstrated a strong correlation with the unemployment rate, which rose 15% in fourth quarter-2008 (4Q'08).

The performance declines continued into 2009, with Fitch's credit card indices registering the worst performance in the agency's 20-year history. Chargeoffs and delinquencies reached record highs month after month. Late-stage delinquencies more than doubled, surpassing 4%, while chargeoffs entered double-digit territory peaking at 11.5% in 3Q'09. Additionally, unemployment topped 9% for the first time since 1983.

Issuers took proactive measures early on in the crisis to improve collateral performance and stave off any potential early amortizations. Actions taken included:

--Improving the overall credit quality of the underlying portfolios;

--Increasing credit enhancement (CE) levels; and

--Turning on discount options.

Aggressive portfolio management actions to improve collateral credit quality included credit line decreases and account closures, and changes to collections strategies helped stem the performance deterioration.

Until mid-2009, unemployment was highly correlated with chargeoffs and delinquencies. Subsequently, the relationship began to diverge in a positive way due to changes in both the characteristics of unemployment and the shifting collateral mix. Two years of elevated chargeoffs and tight underwriting ultimately gave way to improved composition of the pools. This in turn generated rapid and significant improvements exhibit to trust performance variables. Chargeoffs and delinquencies are now inside of historical averages and testing historical lows. Additionally, excess spread, a measure of trust profitability, is nearly double the historical average and monthly payment rates are at record highs.

Throughout the crisis, Fitch continually monitored performance and published break-even stress multiples with and without the additional CE available on a monthly basis. These multiples are shown in the report for each quarter from 2007 to 2011. The results indicate that the trusts would have been able to withstand the performance problems without triggering early amortization or sustaining losses. This took place even if none of the structural changes were implemented. Additionally, minimal downgrades of a category or less would have been necessary for only two trusts.

In depicting the break-even results, Fitch used standardized stress scenarios applied to the rolling three-month average of performance variables. The chargeoff break-even multiples represent the factor by which the current rolling three-month average of trust chargeoffs could increase over the next six months without causing the notes to sustain a principal loss. The benchmark 'AAA' multiple in a neutral economic environment is 4.5x.

When analyzing monthly performance, Fitch allowed for some degree of multiple compression on existing transactions during the recession. Fitch considered the current and expected economic environment, the strength of the servicer, and structural features of the specific transaction before taking any actions. Fitch's multiple compression thresholds for each rating category can be found in the report.

The report graphically summarizes and aggregates the performance of six credit card trusts during the financial crisis from 2007 through 2011. The report is available at 'www.fitchratings.com' on Fitch's Global Structured Finance Performance Statistics Page.

Additional information is available at 'www.fitchratings.com'

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