Following the latest negative performance statistics released recently by The Metris Companies, non-ABS analysts do not have a positive view of the credit card issuer going forward. In addition to concerns over the future of it speculative-grade unsecured debt, with Metris on negative watch from both Fitch Ratings and Standard & Poor's, Equity analysts have lowered earnings estimates for the second quarter.

Kathy Shanley, analyst for independent research publication Gimme Credit, aimed at institutional investors of unsecured debt, sees reason for concern in Metris' rising delinquencies and the diminishing excess spread of its master trust.

Currently at just over 6% the three month average, the company will be forced to trap cash in a spread account should the average dip below 5.5%. With roughly $400 million of cash on hand and access to most other sources of liquidity extremely limited, this event would further restrict the Minneapolis-based parent of Direct Merchants Credit Card Bank.

The May default rate for Metris Master Trust came in at 15.8%, up from 15.1% in April. While Metris had previously stated that it expected delinquencies to peak in the second quarter, "Increased delinquencies for 30- and 60-day periods suggest that it may be too soon to call a bottom to its credit cycle," according to Shanley.

Equity analysts do not see many positives in the future for Metris either. JPMorgan Securities currently rates the company at "underperform" and credit card sector analyst Michael J. Freudenstein concurs with Shanley's concerns over deteriorating credit quality going forward. Citing the same 69 basis point rise in May defaults, "the two-month average of 15.47% (is) 126 basis points above the first quarter average of 14.21%. To date, the Metris master trust data has proven more useful for directional trends rather than absolute numbers."

Salomon Smith Barney equity analyst Matthew L. Vetto takes this analysis a step further, projecting higher losses in the future. "We expect virtually no sequential loan growth in the quarter, and based on trends observed in the company's securitization trust data, we expect credit quality to worsen sequentially," writes Vetto.

Sources close to the situation say that while Metris is one of the best-managed companies in the sector, its status as a non-prime lender in the current economic environment is the albatross around its neck. "Access to the asset-backed market is very important for Metris right now; as it showed with the strong demand seen for its most recent asset-backed offerings that access is there," said one ABS investor.

Metris refused to comment on the analysts' opinions, citing the blackout period ahead of its scheduled July 17 earnings statement. Following the earnings announcement, however, Treasurer Ralph Than promised to revisit the issue in a future issue of ASR.

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