It's tough to be a non-prime issuer in the ABS market these days, when so many big name corporations and financial institutions are publicly associating their losses with their loans: be it credit cards, home-equity or corporate.

Everybody's got a beef with subprime, it seems.

Mid-tier credit card concern Metris Companies, however - who many wrongly associate with impaired or subprime credit - reported for the third quarter a 46% increase in net income year-over-year, and a portfolio net interest margin of 14.2%.

Still, rather than issuing into a market tainted with sector headline risk, Metris has the flexibility to forgo a quarter, an option the company is proud to have, said Treasurer Ralph Than.

"We typically maintain a very strong liquidity position," Than said, adding that Metris is a conservatively managed company. "We have high capital levels at 9.6%, and if you added our reserves in, it would be closer to 18%. We don't take any gains on our securitizations, like a lot of other finance companies do."

According to Than, the company has a $2.1 billion cash deposit (CD) program, and uses securitization for roughly two-thirds of its funding. Other sources of funds have included corporate bond issuance, as well as retained earnings.

Metris has historically alternated between three and four ABS deals annually, and managed its fourth offering on Oct. 11, a $500 million floating-rate deal, structured in three classes, with sen/sub credit enhancement. Deutsche Bank Alex. Brown was lead manager on the deal.

"We had slightly higher credit spreads, as did everyone else in the market, but we were happy with the distribution, and we had plenty of investors who were interested in buying the bonds," Than said. "You do these transactions in both up and down markets, and while the market was skittish, we were able to get it done."

The three-year triple-As priced at one-month Libor plus 35 basis points, 12 points outside of the triple-As on the company's Aug. 15 deal. Down at the triple-B level, the bonds priced at one-month Libor plus 200, compared to Libor plus 170 in August.

Don't confuse us with subprime

"What differentiates Metris from the rest of the industry, is that we are very much a pure play in what I would call the middle market segment," Than said. The company focuses on customers in the moderate income segment, which it considers underserved, as that customer base generally is without extensive credit history.

"So we really don't target the prime or super-prime segment, and we absolutely do not participate in what I would call the impaired credit market, either partially secured cards or customers with blemishes on their credit history," Than said.

Than attributes the company's success to its proprietary underwriting models. Unlike other card issuers who solicit customers with broad invitations to apply, Metris does significant credit work upfront, sending out pre-approved credit offers, primarily through the mail.

"They do get scored and validated at the backend when they respond, but there is a lot of work that goes on upfront," Than said.

The performance of the Metris Master Trust has been stable, and excess spread has been historically in the 6% to 8% range. Roughly 75% of the portfolio is seasoned more than 24 months.

In its earnings report, Metris said that losses from charge-offs were at 10.7% in the third quarter, down from 10.9% in the second quarter. The company reported a slightly higher delinquency rate, but attributes that to the summer season, which has traditionally edged up delinquencies at this point of year.

Metris has yet to see credit deterioration from the economic slowdown. In fact, average payments in the portfolio are actually higher now than they were earlier in the year, Than added.

Metris from the start

At present, Metris is the No. 10 credit card issuer in the country, with a Visa/MasterCard portfolio of just under $11 billion, over 4.8 million accounts.

The company plans to grow its portfolio roughly 10% to 15% 2001.

"We're being cautiously optimistic, and we think that it's not a bad thing to be a little more careful in this economy," Than said. "We have, frankly, taken steps in tightening up our underwriting over the last year-plus, to manage through the soft business environment that we're in today."

The company was formed in 1994, then a part of Fingerhut Corp., and held its first public stock offering in 1996. As it was becoming a standalone financial services company, Metris was spun off to the Fingerhut shareholders in 1998, which at the time was the second largest catalog retailer in the country.

In addition to credit cards, Metris sells enhancement products to its own cardholders and a number of third parties, including other financial institutions. For example, Metris will provides extended warranties, insurance products such as debt waivers, and membership products, such as travel club cards. These revenues represent approximately 15% of the company's business, and do not flow into the securitization structure.

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