CompuCredit Corp., best known for marketing credit cards to subprime consumers, has been shifting its emphasis toward debt recovery, which it says is a better bet in an unstable economy.
Late last year it set up a subsidiary, Jefferson Capital Systems LLC, to buy defaulted accounts and the unit is already a significant contributor to CompuCredit's bottom line. Jefferson Capital has picked up some $1.8 billion in receivables, some for prices in the area of a penny on the dollar.
Most of the purchases, and the income, are from assets acquired from CompuCredit's securitized trust portfolios but that may not always be the case.
"We are aggressively looking for opportunities to buy not only portfolios we've retained interest in, but other portfolios as well." said J. Paul Whitehead, CompuCredit's chief financial officer.
In its second-quarter earnings announcement last Thursday, CompuCredit said that Jefferson Capital generated $3.5 million of profits in the quarter, or 17.5% of its Atlanta parent's $20.3 million of net income. A year earlier CompuCredit had posted a $36.1 million loss.
In a filing with the Securities and Exchange Commission, CompuCredit said that its own managed loans have been declining and that many of its charged-off credit card receivables are undervalued. "We believe it is advantageous to develop limited recovery operations that may allow us to achieve [better] returns on equity."
David G. Hanna, CompuCredit's chairman and chief executive officer, said in a conference call that the consumer lending industry is entering a stage where debt recovery "is a very attractive business."
He and Richard W. Gilbert, its vice chairman and chief operating officer, are both experienced in this realm. Before founding CompuCredit, they worked at Nationwide Credit, an Atlanta debt-buying firm that First Data Corp. sold to NCI Acquisition Corp. of New York at the end of 1997.
"We have succeeded in this business in the past, and we are confident that we will succeed in this business in the future," Mr. Hanna said.
Mr. Whitehead said that if and when CompuCredit's origination business comes back, it will continue to promote Jefferson Capital, as long as the unit produced attractive returns for shareholders.
"This is not an either/or proposition. We'll do both," he said.
The five-year-old company has pursued an unusual business model: marketing cards that are issued by the Columbus Bank and Trust subsidiary of Synovus Financial Corp., which holds the receivables. In addition, CompuCredit has purchased several distressed portfolios, most recently an $859 million one it bought in conjunction with Merrill Lynch & Co. from Providian Financial Corp. That deal closed on Aug. 1 and was not reflected in the most recent earnings results.
Mr. Hanna said he was confident that the Providian portfolio would "generate a nice profit stream for the next few years."
Last year CompuCredit bought another portfolio from Providian, as well as one from Fingerhut Cos. Those receivables represented the bulk of Jefferson Capital's recovery efforts in the first half of this year, its parent said. During that time the unit spent $24.3 million to acquire debts with a face value of $1.8 billion, and it generated pre-tax net income of $10.2 million.
Moshe A. Orenbuch, an analyst at Credit Suisse First Boston Corp., said that because the bulk of Jefferson Capital's collection efforts stemmed from CompuCredit's own trusts, it might have been able to produce the same numbers without setting up a subsidiary to try to recover the debt.
On the plus side, the Providian portfolio it bought this month "wasn't as down and dirty" as the one it bought last year and will likely perform better, he said.
Brian Greenberg, the managing director of Kaulkin Ginsberg Co., a Bethesda, Md., merger and acquisition advisory firm that specializes in the collection industry, said CompuCredit could be a success in the debt recovery business.
Its leaders are "industry veterans, and they're very good at what they do," and it is a "fair and good time" to get into the business, he said. "It's the kind of business that's proven itself to be good in good economic times and good in bad economic times. In good economic times people have the money to pay their debt. In bad economic times additional debt is rung up that will eventually be collected."
