Spiegel Inc., the bankrupt catalogue retailer that could not sell its subprime private-label portfolio, will now have a third-party servicer to take over the loans and try to collect on them.
CardWorks LP will take over the servicing responsibilities for the $2 billion of receivables on June 30, when Spiegel will shut down its card-issuing subsidiary, First Consumers National Bank. The deal, announced Friday, was signed by CardWorks and MBIA Insurance Corp., which acts as the financial guarantor for the trustees of the loans.
The fact that Spiegel has already shut off cardholders' access to the cards, rendering them useless, will make the job particularly challenging, according to Donald Berman, the chairman and chief executive officer of CardWorks, of Woodbury, N.Y.
"It is very tough, hard-core collections work," he said. "You don't have the leverage of saying, 'We are going to close your account.' "
Though Mr. Berman said it is nothing new for his company to collect on closed accounts, he called it unusual to be called in as a successor servicer on a portfolio, and to take over for a shuttered bank.
He said he could only think of one other instance where that happened - Merrick Bank Corp., a South Jordan, Utah, unit of CardWorks, bought approximately $200 million of cancelled loans from NextCard Inc. of San Francisco after bank regulators shut it down last year.
The history of these troubled portfolios may make bondholders, who stand to lose from unpaid balances, more leery of buying card-backed securities in the future, Mr. Berman said, especially if the loans are made to people with weak credit histories, who are typical customers for store cards.
The Spiegel portfolio consists of loans made to customers of the Spiegel, Eddie Bauer, and Newport News store chains, all of which were owned by the Downers Grove, Ill.-based subsidiary of Spiegel Group. Problems with its card business threatened to bring the parent company's operations to a halt, and it has shut down the credit arm while it reorganizes under bankruptcy protection. The retail stores remain open for business.
On May 6, Spiegel announced that it would collect what it could from its bad loan portfolio, and, separately, build a new private-label business through deals with Alliance Data Systems Corp.
Under the 10-year deals, the Dallas-based portfolio management company will set up card programs in the names of each of Spiegel's three store brands.
The loans MBIA has assigned to CardWorks - which owns the subprime card issuer Merrick Bank Corp., and the consulting and management firm Cardholder Management Services - are packaged in securities, with bondholders carrying the risk of losses. With the loans closed to new purchases, bondholders will receive cash from the securities only as customers pay off their balances.
Mr. Berman predicted that there will be additional fallout from subprime card lending. "I think there will be additional trusts that don't perform and will require similar actions."
In turn, such problems could have a chilling effect on the securitization market, he said. "What does the future hold for securitizations and bond markets for subprime accounts? Will new securitizations get done?"
