The agreement that Metris Cos. Inc. signed on Tuesday with the Office of the Comptroller of the Currency is the strictest one, short of an outright shutdown, reached yet as a result of the regulator's review of credit card lenders.
Still, the prospect that the subprime card issuer might be righting itself, coupled with news that Metris had gained access to a significant new line of lending, sent its shares soaring 75%.
The new deal replaced one signed in April and imposes major restrictions on Metris' operations. For instance, it must sell all the credit card loans on its balance sheet by the end of next year, and continue to sell off new balances daily.
Also, Metris' Direct Merchants Credit Card Bank is now allowed to begin paying dividends. As a result of the agreement, the parent will receive an immediate dividend of $155 million. Under the earlier deal, such dividends had been prohibited. The new one requires Metris to adhere to strict, detailed guidelines to continue to receive dividends in the future.
Among other things, the bank must reduce the amount of receivables on its balance sheet to $550 million by the end of this year, from $756.1 million at the end of last year, as a step toward selling them all. And it must provide regulators with daily reports outlining the receivables it has sold and the amount of deposits and other liabilities.
On the plus side, Metris also said Wednesday that it had ended a $170 million revolving credit line and replaced it with an $850 million financing deal with its lenders.
"We are pleased to announce these agreements," said David Wesselink, the Minnetonka, Minn., issuer's chairman and chief executive officer, who took the job in December after the ouster of its founder, Ron Zebeck. "They provide another step forward in returning the company to profitability."
However, the agreement at least tacitly acknowledges that problems are continuing at the bank and spells out a worst-case scenario if it is not able to live up to the terms. "In the event Metris fails," the document says, "the bank shall, at the direction and sole discretion of the OCC, cease granting additional extensions of credit or approval of any authorizations on credit cards."
Though Providian Financial Corp., NextCard Inc., and Capital One Financial Corp. have all come under regulator scrutiny in the past 16 months, none of their regulatory agreements have outlined in such detail the steps the issuers must take in order to stay on the regulator's good side.
The Metris agreement shares a few features with the one Providian made with regulators in 2001, but that agreement was far less specific and gave Providian the option of presenting its own plans for growth restriction and capital planning. It also called for reports, but on a monthly basis, versus the daily reports Metris must provide by 5 p.m. the following day.
Providian was limited to 10% annual asset growth, while Metris was instructed to cut owned receivables and deposits.
In one area, though, Metris seems to have gotten a lighter sentence than Providian. Providian was ordered to stop lending to borrowers with Fair, Isaac scores below 600, and the agreement went so far as to outline the specific credit segments it had to shut down. Under Metris' deal, subprime receivables can represent up to 60% of its portfolio, but that restriction applies only to its on-balance-sheet receivables, not to those it sells.
A Metris spokesman said the portfolio is now about 50% subprime, which the OCC defines as consumers with scores under 660.
Michael Vinciquerra, an analyst with Raymond James & Associates, which does not own any Metris stock, said the new agreement could be viewed as a positive, with a few caveats.
"This gets the OCC off their back a bit, and if they can maintain themselves then the OCC really should not be a major issue for them," he said.
The fact that Metris had secured a $850 million 364-day financing facility was considered good news and probably accounted for the run-up in its stock on Wednesday, Mr. Vinciquerra said. The shares closed at $2.31.
The downside, according to Mr. Vinciquerra, is that Metris may be limited in securing debt, if it does not have a source of cash besides the deposit funding that it may no longer use as heavily to finance new loans.
Without other sources of capital, "they will be completely dependent on capital markets, which can be efficient but it is somewhat risky to have that as the only source of capital, unless they have other as yet unspecified sources," he said. "If the market turns against them and spreads widen, that would mean Metris would have a higher cost of financing."
Mr. Vinciquerra said he expects Metris to continue to post losses for the first half of this year and perhaps break even in the third quarter.
