The recent meltdown in the subprime mortgage sector has raised investors concerns regarding the entire securitization market, negatively impacting asset-backed securitization pricing as well as the profits of those issuing these vehicles.
However new TowerGroup research finds that asset-backed securities (ABS) will continue to provide credit card issuers with financial flexibility to manage funding costs, as well as the ability to capitalise on the expected flow of consumer debt away from home equity lines of credit and toward credit cards. While securitization overall has taken a hit, the impact on the credit card ABS market will be short lived.
Close monitoring of issuing banks by several government agencies means that the ABS market is subject to less volatility than mortgage-backed securities. Though the weakening economy, rising delinquency rates, and problems with subprime will raise the cost of funding ABS issues, TowerGroup believes the credit card ABS market – which currently exceeds $400 billion – will continue to be the source of an estimated 50% of funding for credit card companies.
TowerGroup has found that in the US, new credit card ABS issues were the only asset-based segment to grow in 2007 – new issues through September exceeded $69.0 billion, a 30% increase above 2006. TowerGroup anticipates a weakening of demand in the fourth quarter of 2007, due to investor uneasiness with the credit markets.
Yet it expects that full-year 2007 volumes will be 30% higher than those in 2006 – illustrating investors’ confidence in the ABS credit card market and reassuring credit card issuers of an adequate and economical source of funds to support their growth.