Fitch Ratings says it does not expect the introduction of debt relief orders (DROs) in the UK to have an immediate impact on its ratings of UK credit card ABS transactions but reiterates its Negative Outlook for the sector in light of wider economic factors.

DROs are intended as a simplified alternative to bankruptcy, according to the Insolvency Service, and might be suitable for debtors with 'relatively low liabilities, little surplus income and few assets'. "We expect that the tight eligibility criteria will limit the impact on UK credit card trusts, and that the use of such orders will be focussed on debtors with long-term low income expectations," says Steven Webber, Associate Director in Fitch's Consumer ABS team. "However, Fitch expects UK unemployment to continue to increase in 2009 which could fuel demand for DROs."

Specifically, debtors must have unsecured debts of less than GBP15,000, monthly disposable income of less than GBP50 per month and assets of less than GBP300 (excluding a car of up to GBP1,000). If the circumstances of the debtors change during the period of the order (usually 12 months) then debtors will be expected to make new repayment arrangements. Upon completion of the order the debts are extinguished. DROs will impact all unsecured debts; however, for UK ABS Fitch's focus is on credit cards.

The assistance of an approved intermediary is required to apply for a DRO. Current approved intermediaries include not-for-profit organisations such as the Consumer Credit Counselling Service as well as a number of fee-charging advisors. The application fee is capped at GBP100. Fitch notes the limited fee opportunities for advisors, and expects that this will prevent the aggressive promotion as witnessed with individual voluntary arrangements (IVAs) during 2005 and 2006. Given that the debtor must not be involved in another form of insolvency at the time of applying, Fitch expects to see a gradual increase of cases in coming months.

UK credit card lenders have indicated during initial discussions with Fitch that debtors entering into a DRO will be immediately recognised as a loss (similar to their current treatment of IVAs and bankruptcies) but no originator has so far been able to provide estimates of the likely levels which will be experienced. In the event that a borrower enters into a DRO, rather than waiting to be charged-off after a period of delinquency, this will bring forward reported charge-offs. However, Fitch also expects a degree of substitution from debtor-petitioned bankruptcies to DROs.

During 2008, personal insolvencies totalled 106,544 for England and Wales. This consisted of 56,600 debtor-petitioned bankruptcies, 10,828 creditor-petitioned bankruptcies and 39,116 IVAs. While the level of DROs is currently uncertain, given that they are targeted towards low-income and low-asset debtors, who would have limited unsecured credit exposure, some of which may have a high propensity to charge-off in any event, the impact upon UK credit card trusts is not expected to be significant.