SEC Company Response from METRIS COMPANIES INC (CIK 0001021061) — Oct 4, 2005
METRIS COMPANIES INC (CIK 0001021061)
Date: Oct. 4, 2005 · CIK: 0001021061 · Accession: 0001021061-05-000024
AI Filing Summary & Sentiment
File numbers found in text: 001-12351
Referenced dates: September 23, 2005
Letter
October 4, 2005 VIA EDGAR & OVERNIGHT MAIL Ms. Joyce Sweeney Accounting Branch Chief Division of Corporation Finance SECURITIES AND EXCHANGE COMMISSION Mail Stop 4561 Washington, D.C. 20549
Re: Metris Companies Inc. Form 10-K for the Fiscal Year Ended December 31, 2004 Your File No. 001-12351
Dear Ms. Sweeney:
Metris Companies Inc. ("MCI") submits the enclosed information and documents in response to the Division of Corporation Finance's ("DCF") comment letter dated September 23, 2005 relating to DCF's review of MCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 ("2004 Form 10-K"). For ease of reference, we have listed each of your comments (in bold type) followed by our response. MCI and its subsidiaries are referred to herein as "we," "us," "our," and "the Company."
Results of Operations, page 33
1. We note your disclosure of the components of "Loss on new securitizations of receivables to the Metris Master Trust" on page 34. Please tell us the nature of each component, how you determined the amount, and your basis for including them within this line item.
Response: When we securitize receivables, we sell existing receivables into the Metris Master Trust ("MMT") and receive a retained interest in the transferred receivables along with other assets. At the time of sale, we write off the book value of the receivables sold and record the assets received (contractual retained interests, spread accounts receivable, if applicable, and interest-only strip receivable) at their fair value in accordance with paragraph 58 of FAS 140. The fair value of each asset received is computed based on internally prepared calculations of the present value of the anticipated cash flow associated with each individual asset. The methods of determining such fair value are described in note 2 on pages 63 and 64 of our 2004 Form 10-K and are summarized below:
- Contractual retained interests - represents subordinated securities held by the Company. There is no stated interest/coupon rate associated with these securities and they are not rated. They are subordinate to all other securities and, accordingly, are repaid last. Their fair value is calculated as a zero coupon security using a discount rate commensurate with the risks of the underlying assets and the scheduled maturity date of the underlying securitization.
- Spread account receivable - includes interest-earning cash held by the MMT Trustee due to minimum spread reserve deposits required by certain security series. The fair value is determined by discounting the expected future cash flows using a discount rate commensurate with the risks of the underlying assets. The expected future cash flows include the release of the spread account receivable balance on the scheduled maturity date and the estimated interest earned on the cash balances each month.
- Interest-only strip receivable - represents the contractual right to receive excess spread cash flows (portfolio collections, less principal charge-offs, financing costs and servicing costs) from credit card loans over the estimated life of the securitization series. The fair value is determined by discounting the expected future cash flows using a discount rate commensurate with the risks of the underlying assets based on the expected timing of cash flows in the retained interest valuation model.
The Company utilizes bank conduit facilities and term asset-backed securitization ("ABS") transactions to fund receivables in the MMT. The bank conduit facility provides short-term funding to balance receivable growth, attrition and maturing term ABS. Term ABS are used for longer-term funding needs.
In each of the last three years, we recorded a loss on new securitization of receivables because the fair value of the assets received was less than the book value of the receivables sold. The aggregate result of each of these calculations are combined into one line on our income statement entitled "Loss on new securitizations of receivables to the Metris Master Trust" because they arise from a single type of transaction - that being the sale and securitization of our credit card receivables. This treatment is in accordance with paragraph 11 of FAS 140. Our significant accounting policies associated with retained interests in loans securitized and securitization income are included in note 2 to our consolidated financial statements at pages 63-64 of the 2004 Form 10-K.
The components of our loss on securitization of receivables to the MMT disclosure on page 34 of the 2004 Form 10-K are as follows:
A. "Defeasance of maturing ABS series into conduit" represents borrowing on the Company's variable funding conduit to fund a maturing term ABS series. The components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual retained interest based on a 16% discount rate (for 2003 and 2004) and the term of the conduit facility (12-24 months). - Loss associated with establishing a discount on the minimum spread reserve deposit based on a 16% discount rate (for 2003 and 2004) and the term of the conduit facility, partially offset by interest income earned on the cash balance each month. - Gain associated with establishing an interest-only strip receivable based on expected future excess spread cash flows over the term of the conduit facility discounted at a 30% discount rate.
B. "Amortizing term series financing" represents borrowing on a term series that was established to fund a maturing term ABS prior to the establishment of a two year bank conduit facility completed in May 2004. The components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual retained interest based on a 16% discount rate (for 2004) and the term of the series (2 months). - Gain associated with establishing an interest-only strip receivable based on expected future excess spread cash flows over the term of the series discounted at a 30% discount rate.
C. "Establishment of a new conduit" in 2002-03 represents borrowings on a new conduit facility to fund a maturing conduit facility. The components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual retained interest based on the discount rate (12% in 2002 and 16% in 2003) and the term of the conduit facility (12 months).
- Gain associated with establishing an interest-only strip receivable based on expected future excess spread cash flows over the term of the conduit facility discounted at a 30% discount rate.
D. "New term ABS transactions" represent new term ABS transactions to fund receivable growth or pay down variable funding conduits. The components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual retained interest based on the discount rate (12% in 2002; 16% in 2004) and the term of the ABS series (24-86 months).
- Loss associated with establishing a discount on the minimum spread reserve deposit (2004 only) based on the discount rate (16% in 2004) and the term of the ABS series, partially offset by interest income earned on the cash balance each month.
- Gain associated with establishing an interest-only strip receivable based on expected future excess spread cash flows over the term of the series using the discount rate (25% in 2002; 30% in 2004).
2. Please tell us how recurring losses on new securitizations impacts your decision to continue to securitize your credit card receivables.
Response: Recurring losses on new securitizations have not impacted our decision to continue to securitize credit card receivables. As noted on pages 11-13 (Item 1 - Business) and pages 45-49 (Item 7 - Management Discussion and Analysis of Financial Condition and Results of Operations) ("MD&A") of the 2004 Form 10-K, the Company is primarily reliant upon securitization financing (both bank conduit and term asset-backed securities) to finance its credit card loan portfolio. The Company has not relied on certificates of deposit ("CDs") held by its bank subsidiary, Direct Merchants Credit Card Bank, N.A. ("Direct Merchants Bank" or "Bank"), to fund credit card loans since September 2003 (see page 17 of 2004 Form 10-K). The Company has, in recent years, recorded losses on securitizations primarily due to the relatively low valuations on the assets received upon the sale of receivables into the MMT. At the time, the valuations necessarily reflected the known performance of the credit card loan portfolio and the related costs to securitize the receivables (primarily reflected in the need to provide certain securitization enhancement levels). However, recently improved MMT performance has resulted in lower losses on securitizations. If the MMT continues to experience improved performance and reduced funding costs, it may enable us to modify the assumptions within our retained interests valuation model which may enable us to realize gains on future securitizations.
3. Please tell us how you determine the amount of the (loss)/gain on replenishment of receivables. Tell us how you determine the amount of the discount recorded and the discount accretion.
Response: On a daily basis, new credit card receivables (sales and cash advances) are sold into the MMT. Each month, the Company performs a gain/loss-on-replenishment calculation in accordance with paragraph 76 of FAS 140 to account for the new receivables. As with the loss on new securitization discussed in comment 1 above, at the time of replenishment we write off the book value of the receivables sold and record the assets received (contractual retained interests, spread accounts receivable, if applicable, and interest-only strip receivable) at their fair value in accordance with paragraph 58 of FAS 140. The loss on replenishment is calculated based on data pertaining to the weighted average of all ABS series. This is due to the fact that receivables in the MMT collateralize all outstanding securitization series. Therefore, replenishment of receivables is not ABS series specific.
The components of the loss on replenishment include:
- Loss associated with establishing a discount on the contractual retained interest. The amount of the contractual retained interest associated with the replenished receivables is based on the weighted average contractual retained interest for all outstanding series and the amount of receivables replenished into the MMT. The loss is calculated using an applicable discount rate (12% in 2002, and 16% in 2003 and 2004) and the weighted average months-to-maturity of all outstanding series.
- Gain associated with establishing an interest-only strip receivable based on expected future excess spread cash flows over the weighted average months to maturity of outstanding series discounted at the discount rate (25% in 2002, and 30% in 2003 and 2004).
The discount established on the contractual retained interest, spread reserve discount, and the interest-only strip receivable is accreted into income over the life of each ABS transaction using the effective yield method. In addition, discount accretion related to receivable attrition is recognized each month, which reflects the runoff in the contractual retained interest associated with each securitization transaction.
4. Please tell us the following regarding your securitization activities, providing sample journal entries as needed for clarity:
- how and when you determine the portfolio of receivables to securitize;
Response: Since September 2003, Direct Merchants Bank no longer issues CDs and all receivables originated on newly issued credit cards are funded through the ABS market by selling such receivables to the MMT. This is due to the fact that in July 2003, the Office of the Comptroller of Currency ("OCC") requested, and Direct Merchants Bank agreed, to eliminate federally-insured deposits at the Bank, or the risk thereof to the Federal Deposit Insurance Corporation, by September 30, 2003. This request was disclosed in Note 12 (Subsequent Events) of the Company's Form 10-Q/A for the period ended June 30, 2003, and Note 23 (Debt and Deposits) of our 2003 Form 10-K. The Company decided to sell the deposits to meet the OCC's request.
Prior to this, at the time the Company issued a credit card to a customer, we immediately would determine whether future receivables originated on that card would be funded at the Bank (with CDs) or by the MMT (via the ABS market). Once that decision was made, all future receivables originated on that card were funded via the originally designated funding mechanism (i.e., CD or securitization).
- the typical time period between when a receivable is originated, when you decide to securitize it, and when you enter into the securitization transaction;
Response: Receivables originated on credit cards funded via securitization are immediately sold by the Company to the MMT. There is generally a one-day lag between when a receivable is originated and when it is securitized and sold to the MMT. The MMT uses a combination of bank conduit financing, term ABS and transferor's interests (excess receivables in the MMT provided by Metris) to fund purchases of receivables from the Company. Decisions to initiate term asset-backed securitizations are based
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October 4, 2005
VIA EDGAR & OVERNIGHT MAIL
Ms. Joyce Sweeney
Accounting Branch Chief
Division of Corporation Finance
SECURITIES AND EXCHANGE COMMISSION
Mail Stop 4561
Washington, D.C. 20549
Re: Metris Companies Inc.
Form 10-K for the Fiscal Year Ended December 31, 2004
Your File No. 001-12351
Dear Ms. Sweeney:
Metris Companies Inc. ("MCI") submits the enclosed information and
documents in response to the Division of Corporation Finance's ("DCF") comment
letter dated September 23, 2005 relating to DCF's review of MCI's Annual Report
on Form 10-K for the fiscal year ended December 31, 2004 ("2004 Form 10-K"). For
ease of reference, we have listed each of your comments (in bold type) followed
by our response. MCI and its subsidiaries are referred to herein as "we," "us,"
"our," and "the Company."
Results of Operations, page 33
1. We note your disclosure of the components of "Loss on new
securitizations of receivables to the Metris Master Trust" on page 34.
Please tell us the nature of each component, how you determined the amount,
and your basis for including them within this line item.
Response: When we securitize receivables, we sell existing receivables
into the Metris Master Trust ("MMT") and receive a retained interest in
the transferred receivables along with other assets. At the time of
sale, we write off the book value of the receivables sold and record
the assets received (contractual retained interests, spread accounts
receivable, if applicable, and interest-only strip receivable) at their
fair value in accordance with paragraph 58 of FAS 140. The fair value
of each asset received is computed based on internally prepared
calculations of the present value of the anticipated cash flow
associated with each individual asset. The methods of determining such
fair value are described in note 2 on pages 63 and 64 of our 2004 Form
10-K and are summarized below:
- Contractual retained interests - represents subordinated securities
held by the Company. There is no stated interest/coupon rate
associated with these securities and they are not rated. They are
subordinate to all other securities and, accordingly, are repaid last.
Their fair value is calculated as a zero coupon security using a
discount rate commensurate with the risks of the underlying assets and
the scheduled maturity date of the underlying securitization.
- Spread account receivable - includes interest-earning cash held by the
MMT Trustee due to minimum spread reserve deposits required by certain
security series. The fair value is determined by discounting the
expected future cash flows using a discount rate commensurate with the
risks of the underlying assets. The expected future cash flows include
the release of the spread account receivable balance on the scheduled
maturity date and the estimated interest earned on the cash balances
each month.
- Interest-only strip receivable - represents the contractual right to
receive excess spread cash flows (portfolio collections, less
principal charge-offs, financing costs and servicing costs) from
credit card loans over the estimated life of the securitization
series. The fair value is determined by discounting the expected
future cash flows using a discount rate commensurate with the risks of
the underlying assets based on the expected timing of cash flows in
the retained interest valuation model.
The Company utilizes bank conduit facilities and term asset-backed
securitization ("ABS") transactions to fund receivables in the MMT. The
bank conduit facility provides short-term funding to balance receivable
growth, attrition and maturing term ABS. Term ABS are used for longer-term
funding needs.
In each of the last three years, we recorded a loss on new securitization
of receivables because the fair value of the assets received was less than
the book value of the receivables sold. The aggregate result of each of
these calculations are combined into one line on our income statement
entitled "Loss on new securitizations of receivables to the Metris Master
Trust" because they arise from a single type of transaction - that being
the sale and securitization of our credit card receivables. This treatment
is in accordance with paragraph 11 of FAS 140. Our significant accounting
policies associated with retained interests in loans securitized and
securitization income are included in note 2 to our consolidated financial
statements at pages 63-64 of the 2004 Form 10-K.
The components of our loss on securitization of receivables to the MMT
disclosure on page 34 of the 2004 Form 10-K are as follows:
A. "Defeasance of maturing ABS series into conduit" represents borrowing
on the Company's variable funding conduit to fund a maturing term ABS
series. The components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual
retained interest based on a 16% discount rate (for 2003 and
2004) and the term of the conduit facility (12-24 months).
- Loss associated with establishing a discount on the minimum
spread reserve deposit based on a 16% discount rate (for 2003 and
2004) and the term of the conduit facility, partially offset by
interest income earned on the cash balance each month.
- Gain associated with establishing an interest-only strip
receivable based on expected future excess spread cash flows over
the term of the conduit facility discounted at a 30% discount
rate.
B. "Amortizing term series financing" represents borrowing on a term
series that was established to fund a maturing term ABS prior to the
establishment of a two year bank conduit facility completed in May
2004. The components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual
retained interest based on a 16% discount rate (for 2004) and the
term of the series (2 months).
- Gain associated with establishing an interest-only strip
receivable based on expected future excess spread cash flows over
the term of the series discounted at a 30% discount rate.
C. "Establishment of a new conduit" in 2002-03 represents borrowings on a
new conduit facility to fund a maturing conduit facility. The
components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual
retained interest based on the discount rate (12% in 2002 and 16%
in 2003) and the term of the conduit facility (12 months).
- Gain associated with establishing an interest-only strip
receivable based on expected future excess spread cash flows over
the term of the conduit facility discounted at a 30% discount
rate.
D. "New term ABS transactions" represent new term ABS transactions to
fund receivable growth or pay down variable funding conduits. The
components of the loss on securitization include:
- Loss associated with establishing a discount on the contractual
retained interest based on the discount rate (12% in 2002; 16% in
2004) and the term of the ABS series (24-86 months).
- Loss associated with establishing a discount on the minimum
spread reserve deposit (2004 only) based on the discount rate
(16% in 2004) and the term of the ABS series, partially offset by
interest income earned on the cash balance each month.
- Gain associated with establishing an interest-only strip
receivable based on expected future excess spread cash flows over
the term of the series using the discount rate (25% in 2002; 30%
in 2004).
2. Please tell us how recurring losses on new securitizations impacts your
decision to continue to securitize your credit card receivables.
Response: Recurring losses on new securitizations have not impacted our
decision to continue to securitize credit card receivables. As noted on
pages 11-13 (Item 1 - Business) and pages 45-49 (Item 7 - Management
Discussion and Analysis of Financial Condition and Results of
Operations) ("MD&A") of the 2004 Form 10-K, the Company is primarily
reliant upon securitization financing (both bank conduit and term
asset-backed securities) to finance its credit card loan portfolio. The
Company has not relied on certificates of deposit ("CDs") held by its
bank subsidiary, Direct Merchants Credit Card Bank, N.A. ("Direct
Merchants Bank" or "Bank"), to fund credit card loans since September
2003 (see page 17 of 2004 Form 10-K). The Company has, in recent years,
recorded losses on securitizations primarily due to the relatively low
valuations on the assets received upon the sale of receivables into the
MMT. At the time, the valuations necessarily reflected the known
performance of the credit card loan portfolio and the related costs to
securitize the receivables (primarily reflected in the need to provide
certain securitization enhancement levels). However, recently improved
MMT performance has resulted in lower losses on securitizations. If the
MMT continues to experience improved performance and reduced funding
costs, it may enable us to modify the assumptions within our retained
interests valuation model which may enable us to realize gains on
future securitizations.
3. Please tell us how you determine the amount of the (loss)/gain on
replenishment of receivables. Tell us how you determine the amount of the
discount recorded and the discount accretion.
Response: On a daily basis, new credit card receivables (sales and cash
advances) are sold into the MMT. Each month, the Company performs a
gain/loss-on-replenishment calculation in accordance with paragraph 76
of FAS 140 to account for the new receivables. As with the loss on new
securitization discussed in comment 1 above, at the time of
replenishment we write off the book value of the receivables sold and
record the assets received (contractual retained interests, spread
accounts receivable, if applicable, and interest-only strip receivable)
at their fair value in accordance with paragraph 58 of FAS 140. The
loss on replenishment is calculated based on data pertaining to the
weighted average of all ABS series. This is due to the fact that
receivables in the MMT collateralize all outstanding securitization
series. Therefore, replenishment of receivables is not ABS series
specific.
The components of the loss on replenishment include:
- Loss associated with establishing a discount on the
contractual retained interest. The amount of the contractual
retained interest associated with the replenished
receivables is based on the weighted average contractual
retained interest for all outstanding series and the amount
of receivables replenished into the MMT. The loss is
calculated using an applicable discount rate (12% in 2002,
and 16% in 2003 and 2004) and the weighted average
months-to-maturity of all outstanding series.
- Gain associated with establishing an interest-only strip
receivable based on expected future excess spread cash flows
over the weighted average months to maturity of outstanding
series discounted at the discount rate (25% in 2002, and 30%
in 2003 and 2004).
The discount established on the contractual retained interest, spread
reserve discount, and the interest-only strip receivable is accreted
into income over the life of each ABS transaction using the effective
yield method. In addition, discount accretion related to receivable
attrition is recognized each month, which reflects the runoff in the
contractual retained interest associated with each securitization
transaction.
4. Please tell us the following regarding your securitization activities,
providing sample journal entries as needed for clarity:
- how and when you determine the portfolio of receivables to securitize;
Response: Since September 2003, Direct Merchants Bank no longer
issues CDs and all receivables originated on newly issued credit
cards are funded through the ABS market by selling such
receivables to the MMT. This is due to the fact that in July 2003,
the Office of the Comptroller of Currency ("OCC") requested, and
Direct Merchants Bank agreed, to eliminate federally-insured
deposits at the Bank, or the risk thereof to the Federal Deposit
Insurance Corporation, by September 30, 2003. This request was
disclosed in Note 12 (Subsequent Events) of the Company's Form
10-Q/A for the period ended June 30, 2003, and Note 23 (Debt and
Deposits) of our 2003 Form 10-K. The Company decided to sell the
deposits to meet the OCC's request.
Prior to this, at the time the Company issued a credit card to a
customer, we immediately would determine whether future
receivables originated on that card would be funded at the Bank
(with CDs) or by the MMT (via the ABS market). Once that decision
was made, all future receivables originated on that card were
funded via the originally designated funding mechanism (i.e., CD
or securitization).
- the typical time period between when a receivable is originated, when
you decide to securitize it, and when you enter into the
securitization transaction;
Response: Receivables originated on credit cards funded via
securitization are immediately sold by the Company to the MMT.
There is generally a one-day lag between when a receivable is
originated and when it is securitized and sold to the MMT. The MMT
uses a combination of bank conduit financing, term ABS and
transferor's interests (excess receivables in the MMT provided by
Metris) to fund purchases of receivables from the Company.
Decisions to initiate term asset-backed securitizations are based