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Credit card asset-backed securities rated "AAA" would retain that rating even in the event of a 50% increase in charge-offs on prime credit card account receivables, a 15% decline in yield and a 20% decrease in the monthly payment rates (percentage of balances cardholders pay each month), according to a recent hypothetical "significant stress scenario" by New York-based Fitch Ratings. Under the same scenario, Fitch would downgrade lower-rated classes of securities by "up to three notches." Notches are points in Fitch's grading scale, such as BBB, BB+, BB, BB-, B+, B, and so on. The rating agency's "mild" stress scenario also assumes card charge-offs would increase by 300 basis points, to 9% of receivables from 6% currently, according to Fitch. In that case, monthly payment rates would remain close to what they are now, at about 18%. Gross yield also would remain about the same, at around 18.5%, according to Fitch. (Gross yield includes interest earned on revolving balances, customer fees for such infractions as late payments or exceeding credit limits, and interchange earned on new purchases.) Under Fitch's moderate-stress scenario, charge-offs would increase to 9% of receivables and monthly payment rates would remain at 18%, but yield would drop to 15.75%. "In these scenarios, it is likely that no negative rating actions would occur at the 'AAA' and 'A' rating levels, and downgrades to the 'BBB' level would be limited to two notches or less," the report says.
