Providian Financial Corp.s decision to sell $8.2 billion of its best-quality credit card loans to J.P. Morgan Chase & Co. was a surprising move, even given its need to raise cash and satisfy regulators pressing the tottering company to get back on its feet.
One ominous aspect of the deal was the low premium J.P. Morgan Chase paid for what Providian considered to be its best loans (though they are rather risky by the buyers standards).
It was in the mid single digits, both companies said. In comparison, prime portfolios drew 18% premiums on average last year.
Observers wondered: If Providian is getting a fire-sale price for its finest wares, what are the prospects for the $3 billion portfolio of subprime loans that the San Francisco company put on the block two months ago?
They are selling their crown jewels, said Charlotte A. Chamberlain of Jefferies & Co. You can see regulatory directive all over that. My view is the regulators want to see assets whittled down.
The companies said the portfolio was sold without reserves, meaning Morgan Chase will have to set aside reserves itself. Observers said that may have been a factor in the low price.
Providians new chief executive officer, Joseph W. Saunders, who was installed in late November to turn the company around, tried to put a good face on the deal, which was announced Wednesday. This is a big step forward for Providian, he said in a prepared statement. The sale of the Providian Master Trust enhances our capital, strengthens our liquidity position, and it tightens our strategic focus on our middle-market customers.
Providian said the sale of the $3 billion in weaker loans was progressing, and it characterized the sale of the stronger loans as a step toward getting its portfolio to a more stable and manageable size. Providian, which is to announce its fourth-quarter earnings Jan. 31, said it will report a loss but also substantial enhancements to reserves.
Analysts were pleased with the sale of Master Trust, though some expressed disappointment that the more troubled portion of Providians portfolio had not found a buyer.
My feeling is that Providian has sold some of its good stuff and now is left with more concentration in weaker receivables, said David Hendler, an analyst with CreditSights Inc. of New York.
Mr. Hendler said the sale is reminiscent of Advanta Corp., which exited the consumer credit card business in 1998 to improve liquidity and now focuses on small-business credit cards. My feeling is it is a small step in the right direction, but I still have questions about the core portfolio. The major thing is management can focus on a smaller subset of problems now.
Providians crown jewels do not look particularly lustrous to J.P. Morgan Chase. Richard J. Srednicki, the executive vice president who runs Morgan Chases card business, called the Master Trust portfolio more risky than our existing portfolio, but considerably less risky than the overall Providian portfolio. He said the portfolio consisted of $7 billion in platinum card accounts and $1.2 billion in so-called classic accounts.
Mr. Srednicki said that although the credit risk scores in Providians Master Trust were similar to accounts in J.P. Morgans portfolio, the losses were higher.
We plan to do a number of things differently, Mr. Srednicki said. We will do things with line management, both up and down, and pay more attention to service level and cross-selling. We think we can improve all these things. Mr. Srednicki said the portfolio would convert to J.P. Morgan Chases control in July, and Providian may receive additional payments for servicing the accounts until the conversion.
Analysts said the chargeoff rate on Providians Master Trust which was 7.76% in December was high for a platinum portfolio and probably lowered the price that J.P. Morgan Chase was willing to pay. While the chargeoff rate may have been high for a prime portfolio, it was low compared to Providians overall chargeoff rate for December, 12.94%.
J.P. Morgan Chase said it paid a mid-single-digit premium. Robert K. Hammer, president and chief executive officer of an investment banking firm in Thousand Oaks, Calif., that specializes in portfolio sales, placed the number at about 5.5%.
For someone to pick up a seasoned portfolio for a 5.5% premium is an extraordinarily advantageous price, said Mr. Hammer, whose firm is called R.K. Hammer Investment Bankers. Some quality issues may not compare favorably with platinum portfolios that have sold in the last year, when Mr. Hammer estimates the average premium paid was slightly above 18%.
Also on Wednesday, Providian announced that it had filed capital plans with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Utah Commissioner of Financial Institutions, in compliance with an agreement it signed with these regulators on Nov. 21. The plans are not yet finalized.
In another move, the company said this week that it had hired Warren Wilcox, a longtime associate of Mr. Saunders, as vice chairman for planning and marketing. His marketing and strategic skills will be key ingredients in moving our business forward successfully, said Mr. Saunders in a statement.
Mr. Wilcox has reported to Mr. Saunders at both FleetBoston Financial Corp. and Household International. At Fleet Credit Card Services, Mr. Wilcox was executive vice president planning and development.
Mr. Wilcox said his decision to join Providian was made after he spent a lot of time studying it. What I saw was the glass being half full.
He said he decided that the attributes that propelled Providian to the top ranks of U.S. credit card issuers were still there. As far as the tools and fundamentals and the people to use them, there is a superb platform, Mr. Wilcox said in an interview. I think it is a function of putting the right business strategies in place and making the right decisions.
He said he will be considering whether further sales of Providians holdings are in order. One business unit under scrutiny is the GetSmart loan shopper Web site, which Providian acquired in 1998 for $33 million.
We are reviewing the product line, Mr. Wilcox said, though he declined to single out any products as sale targets. Maybe it should be pruned in some areas and expanded in others. Providian has already stopped advertising GetSmart in Internet banner ads, which Mr. Wilcox said resulted in poor-quality responses. You run a lot of banner ads for a small, unproductive take at the end of the day, Mr. Wilcox said. There is some negative selection.
Mr. Wilcoxs marketing strategies are confined by the terms of the agreement Providian made with federal bank regulators in November. That agreement forced Providian to stop marketing to the subprime market, which had made up 40% to 50% of Providians business, according to some estimates. In addition, Providian is restricted from growing more than 10% a year until federal regulators are satisfied with its progress.
Mr. Wilcox said that, to stay within the guidelines, Providian will move toward the middle market and eventually climb higher on the credit scale. This has the potential to be a superb marketing company, he said.
