Metris Cos. Inc. spent three years turning itself around and by this year looked like it finally had the wind at its back.
Still, it was not surprising that it decided to sell, given what has been happening in the card industry - consolidation, a cost-of-funding disadvantage versus larger players like its buyer, HSBC Holdings PLC, and coming policy changes that some say influenced Metris' thinking.
When asked during one of several recent interviews when Metris decided to sell, Matt Melius, its executive vice president of operations, said: "The answer isn't so much when but why. One of the key challenges we continue to face as a business is funding efficiency - we were competing against banks that were substantially bigger than us."
Another reason Metris decided to sell relates to scale, Mr. Melius said. "Our competitors [including HSBC] are 10 times bigger" than Metris, which has had to fight to be efficient. (The rivals are only getting larger; Washington Mutual Inc. is buying Providian Financial Corp., and Bank of America Corp. is buying MBNA Corp.)
A 2003 guideline from the Federal Financial Institutions Examination Council requires card issuers to raise minimum payments to prevent negative amortization. Sameer Gokhale, an analyst at Bear, Stearns & Co. Inc., said the increases could test consumers' ability to repay their debts and cause chargeoffs to spike.
"Metris apparently has been testing higher minimum payments for a few months," and the "incremental risk" probably contributed to the decision to sell, Mr. Gokhale said.
However, Mr. Melius said the minimum-payment issue had "no real effect" on Metris' decision-making. The company would still have to abide by the guidance after it becomes part of HSBC, he said.
The $1.59 billion deal is expected to close in the fourth quarter.
By now the story of how Metris almost collapsed is well known - by its own admission, it overextended credit to consumers in fragile financial situations. In 2001 it compounded its problems by charging higher fees and penalties, Mr. Melius said. "By pricing higher than the market … we attracted worse customers."
According to Mr. Melius, several key moments marked Metris' recovery. The first was managerial; in early 2002 it ousted its chief executive, Ron Zebeck, a marketing specialist, and replaced him with Dave Wesselink, then its chief financial officer. According to Mr. Melius, the new CEO delegated more responsibility to unit heads.
Mr. Gokhale of Bear Stearns said Mr. Wesselink's financial background and some moves he made were integral to keeping Metris afloat. "They needed a finance guy to make sure they could fix themselves and have access to capital."
Mr. Zebeck, now the president of Universal Savings Banc Holdings Inc., did not return requests for comment. (Last year he filed a wrongful-termination suit against Metris, which countersued, alleging unauthorized personal use of company funds.)
Regulators mandated some of the changes at Metris. An April 2002 deal with the Office of the Comptroller of the Currency instructed it to lower its maximum credit line from $12,500 to $10,000. A year later the company signed a more detailed agreement requiring it to cut receivables and deposits and provide daily reports to the agency.
By the fourth quarter of that year the OCC had "become more comfortable with what we were doing," and the reports became less frequent, Mr. Melius said. (The OCC later investigated Metris' executive compensation, and the Securities and Exchange Commission has investigated its accounting.)
In early 2003 Metris retooled its underwriting and collections. The underwriting revamp was designed to add better customers. For a lender on the skids because of poor credit performance, "if you can't acquire better customers than in the past, there is no future for your company," Mr. Melius said.
For one thing, to avoid the adverse-selection problems that had plagued it in the past, Metris started conducting better market research to make sure it was offering competitive rates.
Though it stuck to its base of borrowers with FICO scores of between 600 and 700, it adjusted its internal scoring model for prospective borrowers to be more selective. Mr. Melius would not go into how it did this, except to say the new model better prioritized the top credits in each of Metris' scoring bands.
The company also put its collectors back working primarily on the high-recovery "peak hours" - nights and weekends - and scrapped an employee retention policy that had let collectors work more "family-friendly" schedules, he said.
The fruits of both revamps began to appear within months, Mr. Melius said. Late in the third quarter of 2003, early-stage delinquencies, a key harbinger of credit performance, on Metris' new vintages of loans were outperforming the older vintages by 30%.
Two capital markets moves let Metris survive long enough to repair its portfolio, he said. As it wound down its bad accounts, it needed capital to start rebuilding the portfolio. To this end, in May 2004, primarily with help from three of its banks, it began a two-year, $1.2 billion asset-backed securities conduit, with a $1.7 billion insurance commitment from MBIA. The arrangement also gave Metris the banks' imprimatur and reassured investors, Mr. Melius said.
Last year it issued $300 million of corporate debt, which, though expensive, raised general-purpose cash it could use for turnaround expenses. Including earlier borrowings, in early November it had $450 million of debt. But by Monday it had all been paid off, according to Jeff Grosklags, a Metris spokesman.
Mr. Melius said the moves bought Metris "time and built a bridge to allow us to fix the operations."
This year it has devoted more resources to building its portfolio, signed partnership agreements, and raised more funds. In the first quarter Metris not only accessed the capital markets with public offerings, but also sold the "BB" pieces of its securitizations to generate tens of millions of dollars in cash.
One of Metris' biggest mistakes was being "late in coming to the realization you have to give customers" discipline, according to Mr. Melius.
"With prime or superprime, you can probably give them more line than they need, but ours don't have as much self-discipline. They will use what they get. If they get a line that is lower, that reduces their average balance, their average payment."
Accordingly, since 2001 the average credit line granted to a new Metris customer has dropped 40% to 50%, he said.
"The focus today is on taking care of the customer and extending the average life of the account," Mr. Melius said. "We may make a little less at a time, but the focus today is not about the balances, but the customers."
