Fitch IBCA expects to assign its rating of `BB-‘ to Metris Companies Inc.’s (Metris) $150 million senior notes issue due 2006.
Fitch IBCA also assigns ratings of `BB’ to the multi-term $300 million revolving credit facility of Metris, and `BB’ to the long-term unsecured certificates of deposit of Direct Merchants Credit Card Bank, N.A. (DMCCB), the company’s wholly owned credit card bank.
Metris’ ratings reflect its solid earnings performance to date, its good capitalization, which was enhanced by a $300 million investment in 1998 by the Thomas H. Lee (T.H. Lee) Co., and its established niche presence in the subprime credit card sector. Concerns center on Metris’ relatively limited track record, rapid balance sheet growth and unseasoned nature of its credit card assets, and the company’s dependence on asset securitization as its primary funding source. The ratings also factor in the announcement that Metris will recognize a $152 million, one-time, non-cash, accounting charge reflecting the impact from the conversion of the $300 million investment by affiliates of the T.H. Lee Co. to the series C perpetual convertible preferred stock. Also, Metris ratings consider the expected completion of the purchase of a portion of the consumer bank card portfolios of GE Capital, which approximated $1.3 billion of receivables as of March 31, 1999.
Metris has reported solid earnings to date despite aggressive provisioning against an expected rise in future net write-offs. While future provisioning should more closely match annual charge-off levels, seasoning of the loan portfolio is expected to lead to higher loss rates in the future. Net income at Metris has been supplemented by increased fee-based income generated by the company’s fee- based services, which include debt waiver programs, membership clubs, third party insurance, and extended service plans.
While loss rates in Metris’ portfolio have to date been as expected, the performance of a nonprime unsecured credit card product has yet to be tested through a full economic cycle. Fitch IBCA is concerned that a period of economic weakness, combined with the limited amount of seasoning of the firm’s existing credit card portfolio, could lead to greater loss levels for the company in the future. As of March 31, 1999, Metris annualized managed net charge-off and 30-day delinquency ratios were 9.40% and 8.00%, which were expectedly above industry norms. These ratios have improved from prior periods as a result of the impact of purchase accounting related to acquired portfolios whose loss characteristics were better than Metris’ existing credit card portfolio. Partially offsetting the high loss rates has been Metris ability to appropriately price its credit card portfolio for risk. Also, the company has maintained healthy excess spreads in its existing securitizations.
In order to reduce the company’s heavy reliance on the securitization market for funding, Metris has begun to diversify its funding sources to include jumbo certificates of deposit issued through DMCCB, as well as senior unsecured debt through the parent company.
With $5.1 billion in total managed receivables at March 31, 1999, St. Louis Park, Minn.-based Metris is an information- based direct marketer of consumer credit card products and fee-based services, primarily to moderate income consumers.Details