Researchers are discussing the potential ramifications on bond spreads and performance from bankruptcy legislation that has worked its way through Congress and is expected to be signed by President Bush. The new law would make it tougher for Americans to shed debts through filing for Chapter 7 bankruptcy and so could have an effect on the consumer borrowing critical to asset-backed bonds.
While all bonds backed by consumer credit could benefit from the tougher restrictions, credit card performance in particular is most likely to be affected, researchers believe. In the long run, most researchers think lower chargeoffs should result from the law because it will discourage consumers from filing for protection, leading to improving performance of outstanding securities and potentially marginally tighter spreads. To be sure, though, the most important factor affecting consumer health is the economy, according to Deutsche Bank researchers, who predict the long-term benefits will be minimal.
In the short run, however, the reform will lead to a spike in credit card chargeoffs throughout the rest of the year, according to a report from Lehman Brothers, which takes guidance from 2001 when earlier reform attempts made it through Congress but stalled in the Oval Office. Still, bankruptcy filings spiked at the time. Brian Zola, researcher at Lehman and author of the report, did not return a call by press time.