As more stringent capital requirements for non-prime lenders reduces the ability of companies such as The Metris Companies and Providian Financial to tap brokered deposits, access to liquidity is expected to become more restrictive, particularly for credit card issuers, according to Gimme Credit senior corporate debt analyst Kathy Shanley.
"I do think it's fair to say that the new capital requirements for bank subsidiaries of subprime lenders are making brokered deposits a less attractive funding source than they were over the past few years," Shanley said.
In general, while these developments are not detrimental for non-prime lenders, a reduction in the diversity of liquidity sources is never a good thing.
"Metris apparently didn't have a problem funding subsequent to year-end; it issued $600 million in asset-backed securities, and set up an $850 million bank conduit facility. But the stricter capital requirements limit a company's ability to tap brokered deposits as an alternative funding channel, reducing the diversity of its funding base," noted Shanley.
In its most recent 10-K, filed with the Securities & Exchange Commission March 22, Metris confirms that, as had been expected, bank regulators have increased the required allowance for loan losses to cover estimated credit losses, as well as raised the capital cushion for loans with sub-660 FICO scores, the OCC definition of subprime.
In order to comply with the new guidelines, Metris reportedly shifted $610 million of receivables out of Direct Merchants, boosting its capital ratio to 11.5% from 8.5%, as of year-end. New guidelines have boosted the required ratio for subprime lenders to 10%.
For its part, Metris vice chairman David Wesselink says that the $610 million was not a removal of receivables, but a transfer of receivables to fill a private placement securitization that priced Jan. 30, without the use of any underwriters. The transaction was done not to boost capital ratios, but to satisfy the reverse inquiry request that was offered to the issuer.
As for the capital ratios, according to its 10-K, Metris reported a total capital to risk-weighted ratio of 13.4%, but because the subprime loans had been risk-weighted twice over at the request of regulators, the percentages appear skewed downward.
Metris' Wesselink continues to call Shanley's contention that this has restricted its access to brokered deposits for funding "erroneous." Metris' reliance on deposits for funding is approximately 17% of capital base. Wesselink noted that, if needed, Metris can raise approximately $50 million through deposits per week.
Providian, meanwhile, is awaiting the closure of its prime portfolio to JPMorgan Chase, which will provide some breathing room for the troubled lender. Although it has been given a waiver to access the brokered deposit market in the short term, the levels commanded by investors make it an unattractive option.
Gimme Credit is an independent research service for institutional investors on unsecured corporate bonds.