CompuCredit Corp., whose internally generated credit card receivables have been essentially shut out of the securitization market for the past two years, has found a partner to take on the portfolio - at the cost of a significant equity stake.
The Atlanta specialty finance company, which late Tuesday reported fourth-quarter earnings of $10.8 million, down sharply from $16.7 million a year ago, simultaneously announced the completion of a two-year $1.25 billion securitization facility with Merrill Lynch & Co. The deal, which gives the New York investment bank a 4.5% equity position in the company, secures for CompuCredit an advance rate of 90-odd cents per $1 of receivables, enough for it to originate new loans again, it says.
Over the last two years CompuCredit, which has $2.34 billion of managed receivables, has grown by acquisition, picking up distressed portfolios from Providian Financial Corp. and Fingerhut Cos. But its organic $1.3 billion book of subprime card loans has not grown for 24 months, largely because of the company's inability to find attractive securitization.
Like other specialty finance companies that have grappled with the dilemma of relatively high cost of funds, CompuCredit is a nonbank with no deposit base to tap into. Unlike those companies, it does not even have a banking charter and must rely on the Columbus Bank and Trust Co. subsidiary of Synovus Financial Corp. to issue its Aspire Visa credit cards. Columbus Bank then sells the loans to CompuCredit, which securitizes them right away.
CompuCredit is emerging from a very difficult market for subprime consumer loans, where high chargeoffs made attractive securitization rates tough to find.
"We refrained from growing in this area because we couldn't get the funding we wanted," chief executive David Hanna said during a conference call Wednesday morning. "We have said we would grow the business again when we have the proper funding."
Nonetheless, the company's stock took a tumble Wednesday. It closed at $21.18, down 10.4% from Tuesday's close, as investors appeared to focus on the company's reported GAAP earnings of 23 cents per share, down 35% from the year-ago period.
Analysts at Bear Stearns estimated that earnings on a managed basis were 95 cents per share, beating their earlier estimates and providing "a better perspective of underlying business trends than GAAP earnings."
Merrill Lynch will receive warrants for 2.4 million shares of common stock at $22.45 a share, which works out to about 4.5% of equity, including preferred stock, on a fully diluted basis.
Mr. Hanna said his company gave Merrill "a significant equity stake so they think and act like an equity holder" as well as a lender.
Brad Hintz, an analyst with Alliance Capital Management LP's Sanford C. Bernstein & Co. who covers Merrill, called the deal "an infrequent transaction but a wonderful idea." Linking an equity deal with a securitization is unusual, he said, but "essentially equity will serve as the payment" in this transaction.
Furthermore, he said, "this is a buoyant equity market, which means I'm quite certain that Merrill Lynch as no intention of hanging onto ownership forever." Merrill, he said, saw "an opportunity to take advantage of where we are in the cycle."
Merrill Lynch did not return calls by deadline.
Under the agreement, this year CompuCredit will receive funding for $1.25 billion of receivables, which can increase to $1.5 billion next year if certain performance standards are met. According to chief financial officer J. Paul Whitehead, who spoke with Mr. Hanna on Wednesday's conference call, today CompuCredit still has at least $150 million to draw on from the facility, and it expects to free up $75 million more after August.
CompuCredit will also be able to renew the contract for an extra year at the end of the two-year term. The deal, it said, is unrelated to last year's joint venture with Merrill to purchase $824 million of Providian receivables.
"We have fully executed on a key strategic initiative to solidify our liquidity and cash position," Mr. Whitehead said.
The unfavorable market for asset-backed securitization, driven down by the subprime collapse of 2002 and subsequent regulatory heat, was "a phenomenon over which we had little or no control," Mr. Whitehead said. "No empirical data" about the company's performance could make a difference to the unattractive funding options it faced, he said.
In a research note Wednesday, Bear Stearns analysts David Hochstim and Sameer Gokhale wrote: "The apparently more favorable advance rates from this [Merrill Lynch] facility should enable the company to originate loans on more favorable terms, but we remain concerned about the profitability of originations in the sub-600 FICO segment."
But Mr. Hanna was bullish about what he called the "upper tier" of the subprime consumer category - apparently something like the "middle-market" target of Providian Financial Corp., another company the subprime card market punished two years ago. Tests by CompuCredit are showing "more market opportunity since 1999," Mr. Hanna said.
"We know much more today than we've ever known" about this segment, including how to manage credit activity by imposing limits and other measures, Mr. Hanna said. Net chargeoffs in the quarter dropped 2 percentage points from the year-earlier period, to 15%. Delinquencies of at least 60 days fell 1.9 percentage points, to 12%.
David Hendler, an analyst at CreditSights Inc., said economic improvements could well usher in a more attractive middle market for consumer credit. Job growth and other positive indicators "should be good for that tier, which has probably been hanging on by its fingernails for last couple of years or so," he said.
