PRA+ECPG Swing {hold} for Sep wk 2

5 Eyl 2020

Over the last 20 years, total revolving credit owned and securitized is just under 1.1trillion. The charge off rate going back 20 years. In the last crises, we peaked at +%10.5. This is directly correlated to defatling or (180+ days= default). With continuing claims as the independent variable, the charge-off rate is thus dependent. So, for every 1+ million in jobless claims, there is a +1.3% increase in the charge off rate oof credit card corp. paper. However, there is an enormous wave of charged off paper coming down the pipeline later this year (it takes 180 days for banks to charge off delinquent receivables (credit cards)). A Lot of banks rolled out forbearance about 1-2 months a piece, so 6 months beyond this would take us into the later q4 of this year, and into 2021. So this call is a fundamental call to the upside, so keep in mind my duration is multi-year and long-term holding un-marginalized.

Historically speaking, when you get a 200 BP rise in the charge off rate, you get a 25% reduction in pricing. This produces a better estimated gross income multiple. What if pricing were to fall by half, with a wave of defaults coming later? This multiple could expand more than 10x, making 2008 credit card defaults look miniscule. I expect this cycle of forbearance could take some time and is a good question. Right now, we have forbearance rates around +8.5%, and delinquency above +6%. The dynamic is unprecedented and above where mortgage delinquencies were in 2008. The biggest uncertainty is what will happen to the enhanced jobless numbers? The majority of 65-70% of people collecting benefits, are collecting more than when they were employed. And this is proven because of both the state and cares act, roughly 1K per week, over +50k per year being unemployed. These expire at the end of July. The next round of stimulus (HEROS) with members on both sides at a gridlock.

This all includes mortgage, auto, credit cards, etc. I think the foreclosure rates will rise, but mostly it will all depend on the rate at which un-employment recovers and what the extensions to the stimulus mentioned above.