While many factors can be indicative of the state of the U.S. economy as
a whole, the unemployment rate is one of the most widely acknowledged
indicators of consumer health. Therefore, Fitch Ratings has analyzed the
historical relationship between changes in the unemployment rate and
changes in U.S. consumer asset-backed securities (ABS) loss rates. Based
on this analysis, Fitch believes that typical prime credit card and auto
transactions could withstand an increase in the unemployment rate of
four-to-five times the current rate at the 'AAA' level and roughly one
and one half to two times at the BBB level all else being equal. Fitch's
forecast is for unemployment to increase steadily to the 5.5% range by
year end.
After reaching multi-year lows in first half-2007 (1H'07), the
unemployment rate, auto loan losses and credit card losses have been
rising. While they are all still considerably lower than the recent
highs reported in mid-2003, ABS investors are seeking more information
on the potential impact of continued increases in the unemployment rate
on auto loan & credit card transactions.
According to analysis performed by Fitch, increases in the unemployment
rate are expected to cause auto loan and credit card loss rates to
increase proportionally with subprime assets experiencing the highest
proportional rate. For example, prime credit card chargeoffs should
increase on a 1:1 basis. Accordingly, a 100% increase in the current
unemployment rate, from 4.8% to 9.6%, would lead up to a 100% increase
in current prime credit card chargeoffs, from 5.6% to 11.2%. For
subprime credit cards and auto loans the proportional increase is closer
to 1.3:1 meaning a 100% increase in unemployment would lead up to a 130%
increase in chargeoffs or losses.
Based on this analysis, unemployment in isolation would have to
increase, from 4.8% to more than 20% in order to cause a first dollar
loss to typical 'AAA' rated credit card and auto transactions. Typical
'BBB' securities could withstand an increase in the unemployment rate to
more than 9% for auto transactions and close to 11% for credit card
transactions. For comparison, the unemployment rate is estimated to have
peaked in the 24-25% range in 1933. Post-war unemployment levels peaked
at 10.8% in 1982 and over the past 30 years the unemployment rate has
averaged approximately 6%. "Consumer ABS transactions rated 'AAA' can
withstand unemployment stresses to levels not seen since the Great
Depression," said Kevin Duignan, Managing Director and ABS Group Head.
Fitch stated in February that it expects collateral performance to
decline steadily throughout 2008 in the credit card receivable and auto
loan assets. However, Fitch believes that the credit enhancement and
structural features of the transactions are sufficient to stave off
widespread negative rating actions in those sectors.
Fitch will issue a special report in the coming weeks that will include
a more detailed discussion of the ramifications of rising U.S.
unemployment on U.S. credit card and auto loan loss rates.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant policies
and procedures are also available from the 'Code of Conduct' section of
this site.
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