by Joseph Kenny | 08/6/09

As the number of defaults continues to increase it sounds like Moody's Investors Service plans to slash ratings on $64.5 billion in bonds that have been backed by credit card payment by Bank of America Corporation.

Within the last three months, the charge-off rate has increased by nearly 50%, according t a statement made by the New York-based ratings company recently. The rates were 14.1% in June. Back in March, it was at 9.6%. Charge-offs are those accounts that have been designated uncollectible.

"The steepness of the recent trend in charge-off rates was unexpected and falls outside of our recently revised expectations," said a Moody's representative in the statement.

Bank of America has started taking steps back in March to protect its top-ranked bonds from losses and prevent any further reductions in ratings even as the delinquencies continue to rise. One of the main protective measures in this effort is set to expire in September.

Bank of America is not required to provide an extension of this supposed discount option, but the odd are very favorable that it will. This option would allow the lender to reclassify its principal payments as interest, which would increase the returns on the asset-backed portfolio for relevant investors.

Bank of America's credit car unit issued a report of $1.62 billion in losses as of July 17. This was against the $582 million in profit recorded for second quarter of 2008. The company's June charge-off rate was 13.86%, the highest of the five banks that reported back on July 15, including Discover Financial Services, American Express Co., Capital One Financial Corp., and JPMorgan Chase & Co.

The other four banks have already taken significant steps to cut down the losses they have suffered on credit-card asset-backed bonds. Among them, the banks have removed those accounts from the pools that have had poor performances. They have also increased the relative cash cushion that protects their investors from any losses by issuing new types of securities and limiting them to their own books.