With the purchase of about $1.3 billion in receivables from troubled Providian Financial Corp., CompuCredit Corp. appears to be bouncing back from its own difficult 2001 to take a leading role in the market for subprime credit cards.
The deal will give Atlanta-based CompuCredit a higher profile in the subprime credit card business, where it has worked since its inception in 1996, industry observers said. The firm, which has been seeking a bank charter, relies now on Columbus Bank and Trust, a subsidiary of Synovus Corp., to issue its Aspire Visa cards.
Questions remain about the transaction, which is being done through a limited-liability partnership involving Goldman, Sachs & Co. and Citigroup Inc.s Salomon Smith Barney. And CompuCredit has experienced some suffering lately, including a chargeoff rate of 15.3%, a fourth-quarter loss, and an accounting dispute that led last month to the resignation of its auditor.
The transaction, which remains contingent upon financing and other closing conditions, is expected to close in May. Providian is expected to take an after-tax loss of $240 million on the sale.
The buyers plan to finance the acquisition through a securitization. That will include about 1.7 million credit card accounts. But it was not clear how many of those accounts CompuCredit will manage.
The deal would nearly double CompuCredits receivables. At the end of the fourth quarter the company was managing $1.9 billion in loans, with 2.2 million accounts.
Another limited-liability partnership involving Goldman, Salomon, and CardWorks Inc. apparently would take on the other $1.3 billion in Providian receivables. Representatives of Goldman and Salomon declined to comment on Monday. Representatives of CardWorks, of Plainview, N.Y., also declined to comment.
CompuCredit said it would not comment beyond a press release because the deal has not been completed. But in the press release, David Hanna, its chairman and chief executive officer, is quoted as saying, We have successfully purchased similar receivables in the past, and we hope to have similar success with this purchase.
In 1998 the company purchased about 58,000 accounts in excess of $130 million in receivables from Discover Card known as the Bravo portfolio. Moshe A. Orenbuch, an analyst at Credit Suisse First Boston, said the price was a significant discount and CompuCredit made a lot of money on the deal. The current deal has a similar discount, he said.
CompuCredit has had difficulties in the market lately. The company delayed issuing its fourth-quarter earnings report because of a disagreement with its auditor, Ernst & Young, over how to report the sale of $26 million of bonds backed by its card receivables. The bonds, with a face value of $36 million, were sold at a discount. CompuCredit claimed that Ernst & Young told it that the discount could be amortized as interest expense over the remaining life of the securitization. But when Ernst & Young began auditing the 2001 financial statement, it told CompuCredit the sale must be recorded as a loss.
In the end, CompCredit reported a fourth-quarter net loss of $33.2 million, or 72 cents a share for 2001. Ernst & Young resigned its appointment as auditor because of the dispute over the handling of the loans, though it agreed to complete the 2001 audit.
Obviously the companies has been having problems with credit quality, but also theyve had trouble growing, said Richard McCaffery, an analyst for Morningstar Inc.
On the down side, the types of loans CompuCredit is purchasing are, as one analyst said, the worst of the worst.
Obviously these receivables have some challenges, Mr. McCaffery said. Providian didnt want them. They have to pick through and see what they can manage. Its a company thats willing to work with people. But from an investors perspective, CompuCredit is a risky investment.
James L. Accomando, president of Accomando Consulting Inc., a credit card consulting firm in Fairfield Conn., said that with Providian no longer marketing its cards to subprime consumers those with Fair, Isaac & Co. credit scores of 640 to 680 and lower there was a huge void in this market that few companies are willing to fill.
But he added that while the deal builds balance immediately for CompuCredit, the jury is out on whether the company will be able to manage the high risk loans.
