European credit card collateral

As with delinquencies, charge-offs for Europe and the United States show similar patterns. However, the significant gap between charge-offs in Europe and the United States shows the relative attractiveness of European credit card collateral compared with US collateral, reflecting the intensity of competition in the US market and the greater tendency to file for individual bankruptcy. 

Excess spread for European credit card collateral has traditionally been higher than excess spread for US collateral. This is due both to higher portfolio yield and significantly lower charge-offs in Europe. 

Credit card ABS (CCABS) constitute one of the most liquid and widely accepted asset classes in Europe and most European ABS investors are likely to hold some credit card securitisations. The purpose of this chapter is to discuss the structural features and investment characteristics of CCABS. The focus is on the UK credit card ABS market because the vast majority of European credit card transactions are backed by sterling-denominated collateral. 

We will discuss portfolio yield, monthly payment rate (MPR), delinquencies, charge-offs, and excess spread as well as excess spread efficiency (ESE) and charge-off coverage (COC) the latter two are combinations of the first five performance indicators. The various performance indicators will be shown for European and US credit card collateral. We will use our BECCI for European collateral and Standard Poor s Credit Card Quality Indexes (S P Index) for US collateral. 

As Exhibit 13.14 shows, yields have fluctuated on a month-on-month basis, both in Europe and in the United States, owing to the different number of days available for collection each month. For example, there was an extra bank holiday in June 2002 in the United Kingdom for the Queen s Jubilee Celebration. As more than 90% of European credit card trusts hold solely UK collateral, the reduced number of collection days in June had a significant impact on our European performance indicators. Cash collections for the master trusts fell by more than a fifth in June with a direct knock-on effect of reducing portfolio yield by almost 20%. 

As Exhibit 13.16 shows, delinquencies for European and US credit card collateral basically moved in tandem between April 2001 and September 2002, with figures for Europe consistently lower than those in the United States. In September 2002, the European one-year average stood at 4.53%. This is 76 bp lower than the one-year average for the S8cP Index of 5.29%. 

Excess spread is a particularly important measure of the health of a credit card portfolio and negative excess spread will usually trigger early amortisation. Excess spread is portfolio yield less servicing fees, note coupon, charge-offs, and other costs. Exhibit 13.20 shows 3-month average excess spread for European and US credit card collateral. 

The European credit card securitisation market has grown substantially, both in terms of absolute size and in number of issues. Although the market has traditionally been dominated by sterling-denominated collateral, the securitisation environment in various European countries bodes well for credit card securitisations which should attract banks and specialty lenders looking for alternative sources of funding and effective ways to manage their balance sheets. 

EXHIBIT 18.8 Credit Card Issuance—European Collateral... 

From the 28 CCABS transactions shown in Exhibit 13.4, 26 are backed by sterling-denominated credit card receivables and two have euro-denominated collateral. In 2000, Findomestic Banca S.p.A. issued 311 million of notes backed by Italian credit card receivables. In 2001, Diners Card Europe S.p.A. (and other European Diners Club operations) completed its first transaction in a euro-denominated issue. The collateral includes receivables in Italy, Germany, the United Kingdom, Ireland, the Netherlands, and Belgium. 

The ESE ratio is defined as excess spread divided by portfolio yield it measures the ability of the servicer to turn yield into excess spread. The greater the ratio, the smaller the predicted impact of a slowing economy on the performance of the collateral. As Exhibit 13.21 shows, the prime issuer (issuer 1) has a much higher ESE ratio than the subprime issuer. The September 2002 ratios for European and US credit card portfolios are 44% and 39%, respectively. 

Three types of consumer finance receivables have been securitised in the past credit card receivables, auto receivables (essentially auto loan and auto lease receivables), and other consumer finance receivables, which typically include unsecured personal loans. Credit card receivables are discussed in Chapter 13. The purpose of this chapter is to provide an overview of the European auto and consumer loan ABS markets and review the structural, collateral, and performance characteristics of the two asset classes. We decided to review auto and consumer loan ABS combined in one chapter because of the many similarities between the two asset classes. 

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