At a time when most credit card issuers are pulling back, Alliance Data Systems Corp. is trying to navigate the recession by expanding its private-label portfolio.
Alliance Data Tuesday announced that it issued $709 million, which was upsized from $560 million, of term ABS to investors participating in the U.S. government's Term Asset-Backed Securities Loan Facility (TALF) program. The ABS pertain to the World Financial Network Credit Card Master Note Trust as part of the securitization program for the credit card company's private label credit card banking subsidiary, World Financial Network National Bank. According to a release from the firm, the deal represents the firm's continued strategy of "utilizing various funding sources to achieve an overall balanced funding structure."
The firm plans to place a total of $2 billion through the government program this year.
The Dallas company, the fifth-largest issuer of store cards for retailers, says it can pick up large numbers of highly creditworthy cardholders in this environment, notwithstanding the strains on consumer finances.
"We play in a certain sandbox, and that sandbox has about 300 retailers, and they tend to be a little bit on the higher end," Edward Heffernan, Alliance Data's chief executive, said in an interview this week.
Because it has a relatively small portfolio ($4.3 billion of managed receivables), and "because we only play in one part of the pool, we're not faced with the issue of stopping because we've exhausted that pool," he said. "We can expand for a long, long time."
Growth will be critical in the company's efforts to meet its targets this year. Additional accounts generate more revenue, and accounts that do go bad typically do not do so right away. So an expansion in a pool of receivables can precede an increase in unrecoverable loans while suppressing a portfolio's chargeoff rate.
Heffernan said in an investor presentation last month that credit loss rates could "skyrocket" for competitors.
But for Alliance Data, "the difference is, the bank card industry is shrinking," he said. "We are growing, not because we changed credit [standards], but because we signed retailers. We're going to skim the cream off the crop with those retailers."
Some analysts accept the premise, citing chastened lending terms across the industry and the withdrawal of large credit card issuers from the hunt for new business because they were burned by excessive growth during the bubble, or because they are part of conglomerates hamstrung by problems elsewhere.
"As competitors retrenched, the market is becoming more rational," said John Grund, a partner at First Annapolis Consulting who advises retailers on private-label cards. Alliance Data is "basically looking to capitalize on areas or relationships that their competitors are either underserving or exiting."
Still, the company has been dogged by doubters. Last month short interest surged to over 35% of Alliance Data's stock float one of the highest levels for any company in the country. Robert Napoli, an analyst at Piper Jaffray Cos., said the negative bets may have reflected "the hope that credit losses are going to blow up sometime."
Napoli said he does not think that will happen. "The way they're growing, I think, is more important than the fact that they're growing. If you looked at their portfolio on a same-customer basis, they're definitely shrinking" old cardholders' balances have declined. "But because they don't have any competition, they've been able to sign up new customers or have bought a few portfolios."
Last year operating income at Alliance Data's credit card lending unit fell 28.7%, to $240.9 million. Heffernan, who became the CEO last month after almost eight years as the chief financial officer, said profits from the card business will probably slip this year, but not by much. He cited increased charges on borrowers who fall behind, lower funding costs resulting partly from the government's TALF and more lending.
"We're seeing those positives come in, but they're not quite at the point of offsetting the higher credit losses," he said in the interview. "You're beginning to build up some steam as a mitigant to higher credit losses, and it's just a question of when we hit the point during the year where we finally fully offset it."
Alliance Data's February managed chargeoff rate fell 40 basis points from January, to 8.5%. At press time the company had not reported March data.
Growth in its credit card portfolio as measured by average receivables stalled last year, in part because of the loss of Charming Shoppes's Lane Bryant business in late 2007.
In December, Alliance Data bought $138.9 million of receivables as a part of a deal to take over the credit card program at HSN. Those accounts contributed to a 9.7% increase in Alliance Data's managed portfolio from a year earlier, to $4.3 billion in February. (Its biggest retail client is Limited Brands.)
Alliance Data says its focus is on initiating programs, though it plans to buy two or three portfolios each of the next two or three years. It has said the HSN portfolio is about the size it is looking for.
"We're not big on buying files, but there are files out there," Heffernan said during the investor presentation.
"There are no bidders. We're it, and with TALF, we have the liquidity."
"We are going to bulk up private label and let them roll," Heffernan said last month. "Why bulk it up if they're going to have [credit] losses? I make 1,300 basis points on assets. Unless you think unemployment's going to 22%, I should be buying. So we're going to take advantage of this weakness in private label, bulk it up, set it off to the side, and then when this thing passes, they're just going to have one heck of a fun run."
As of the market's close Wednesday, Alliance Data stock had rebounded 79.6% since the investor presentation, when the company once again reiterated its projection of 17% to 18% growth in cash earnings per share this year.
The company is scheduled to report its first-quarter results on April 22.
