CompuCredit Corp.'s decision to start selling its Aspire Visa credit cards to subprime consumers was interesting not only on its face, but also because of what went on behind the scenes: hard bargaining with Synovus Corp.
Since it is a marketing company, not a bank, the Atlanta-based CompuCredit relies on a Synovus banking unit - Columbus Bank and Trust of Columbus, Ga. - to issue and underwrite the cards. But an unusual arrangement shields Columbus from risks associated with CompuCredit's customer base. CompuCredit is obliged to reimburse the bank for $1 million of card receivables and buys back any receivables in excess of that at the end of each day.
What is in it for Synovus? It is the majority owner of TSYS, the card processor that handles CompuCredit's business.
Synovus exerts a lot of control over CompuCredit, which, unless it were to find a new bank partner, would have no business without the Columbus deal. It can approve or overturn CompuCredit's lending decisions, requires letters of credit or other collateral from secondary sources in the event of any default, and has an employee at CompuCredit offices monitoring the books.
Mark Holladay, Synovus' chief credit officer, said that it always requires collateral and other safeguards to guard against the reputational, credit, and regulatory and compliance risks in deals like the one with CompuCredit.
For example, CompuCredit had to get Synovus' approval before it could market to subprime consumers. "If a company wanted to get into a subprime area - and I'm not talking about a specific company - any bank that issues cards has the right to approve or not approve that credit criteria," Mr. Holladay said. "That's built in to our up-front agreement. Certainly if we disagreed, they could not do that with us."
Another precaution Synovus takes is to include exit strategies involving performance covenants and early-warning triggers to protect itself in case of default.
As for the CompuCredit arrangement, Mr. Holladay admitted that the $1 million cap on receivables is an arbitrary amount. Analysts said that with a market capitalization of nearly $6 billion, $1 million is an insignificant risk to Synovus.
Analysts agreed that the cap leaves Synovus well-insulated from the risks that CompuCredit customers might pose. (Though CompuCredit says there is a difference between its current customer base - which it describes as "underserved" - and the subprime market it is about to pursue, analysts have tended to perceive it as a subprime card company.)
To Christopher Marinac, an analyst at SunTrust Robinson Humphrey, issuing cards for CompuCredit is "more or less headline risk" for Synovus. If losses brought down CompuCredit, "it would create a sort of taint in a minor way to Synovus," but "I don't worry a lot about that."
Bob Patten, an analyst at UBS Warburg, said: "Are they making an exception to normal credit policies for growth? The answer, in my view, is no." Synovus "continues to run a sound system of checks and balances, which is evident."
And Kevin B. Reynolds, an analyst at Regions Financial Corp.'s Morgan Keegan & Co., said that though subprime is recognized as "a dirty word," it "doesn't scare me quite that much." He said he had confidence in the management teams of Synovus and its subsidiaries and "their ability to balance the risks and rewards in their business models."
CompuCredit, meanwhile, says that a subprime strategy makes sense now, because so many companies are retreating from it and creating a void. But the argument cuts both ways, since those companies are on the retreat because they got burned.
Nevertheless, CompuCredit has been hungry for growth and frustrated in its attempts to grow organically. Its only growth over the past year came through the purchases of distressed portfolios, and even they were not enough to prevent erosion in its loan portfolio and its cardholder base.
At an investor conference on Feb. 4, CompuCredit's management team said it will continue to look for portfolios to buy and will begin taking on subprime customers in the third quarter, assuming it can find reasonable funding for its plans.
That may be a big if. It said the decision to shift gears came partly because it could not get what it considered to be reasonable funding to market its Aspire brand to its typical cardholders.
"Everyone else has their own idea of those benchmarks," said Nancy King, CompuCredit's head of investor relations. "It doesn't fall within a traditional FICO score band. We have our own scoring models." But she would not reveal the details of CompuCredit's agreement with Synovus.
A number of analysts also said that Synovus has a vested interest in CompuCredit's marketing scheme, because TSYS, which is 81% owned by Synovus and has been struggling of late, could benefit, if only incrementally.
"With the companies like Providian contracting, some of their growth opportunities have diminished," said Jason Goldberg, an analyst for Lehman Brothers. "This is one avenue to help improve their growth aspects in this arena."
Eric Bruner, a spokesman for TSYS, stressed that it "is not involved in the business strategies for any of our business customers."
