For most U.S. ABS issuers, 2004 was a year of prosperity. Driven by an overabundance of demand, many issuers repeatedly tapped the primary market, pricing transactions at steadily tightening spreads. For Metris Companies, however, 2004 was a year of uncertainty and rebirth.
Coming into 2004, Metris was in the midst of a portfolio overhaul, in which it sold off parts of its credit card portfolio and allowed other customers to leave via attrition. As its portfolio was shrinking, Metris had four outstanding term credit card securitizations coming due in 2004, as well as $100 million of 10% unsecured obligations, due later in the year, which were called at par.
"We were in a unique position at the start of last year," Metris Senior Vice President and Treasurer Scott Fjellman admitted. The Minnetonka, Minn.-based credit card issuer huddled with its bank lenders - Banc of America Securities and Deutsche Bank Securities initially - and monoline insurer MBIA, which was insuring five of its outstanding deals and would be needed if Metris was to return to the ABS primary market in 2004.
With its financial obligations coming due and an unsecured credit rating hovering dangerously close to default, the group came up with a plan and executed it flawlessly. Metris set up a pair of conduit facilities, with Banc of America and Deutsche Bank, to fund portfolio growth in the interim. Later, Barclays Capital and Goldman Sachs, which had served in an advisory role, were brought on board to provide additional liquidity and help sell the story to investors.
With the paired conduit facilities in place and the support of its financial guarantor, Metris had its banking partners put up the money to defease the series 1999-1 in March (see ASR 3/8/04), a move it announced in conjunction with a generally positive earnings restatement.
This set the stage for its return to the primary market the following month, a $200 million series 2004-1 three year offering backed by a full MBIA wrap. The transaction was a success, pricing at 28 basis points over one-month Libor, two basis points inside of indicative price guidance. Conduit providers Bank of America and Deutsche Bank jointly led the offering.
Then, with its fourth consecutive positive trust performance report of the year in late September, the stage was set for Metris to come full circle and issue its first senior/subordinated transaction in three years.
In late October, Metris not only completed the unwrapped deal, offering the issuer's first double-A rated class, but doubled the offerings size to $600 million, while tightening across the capital structure - 10 basis points for triple-B rated subordinates.
While Metris is not yet fully out of the woods, its darkest days are behind it, making it the first company to use securitization exclusively to fuel a corporate turnaround and avoid bankruptcy.
"The plan that was ultimately executed was the best plan," Fjellman added. "But all other plans on the table involved securitization in some way."
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