SEC Company Response from METRIS COMPANIES INC (CIK 0001021061) — Oct 18, 2005
METRIS COMPANIES INC (CIK 0001021061)
Date: Oct. 18, 2005 · CIK: 0001021061 · Accession: 0001021061-05-000026
AI Filing Summary & Sentiment
File numbers found in text: 001-12351
Referenced dates: October 14, 2005, September 23, 2005
Letter
October 18, 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. ("Metris") submits the following information in response to the Division of Corporation Finance's ("DCF") comment letter dated October 14, 2005 relating to DCF's review of Metris' 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. Metris and its subsidiaries are referred to herein as "we," "us," "our" and "the Company."
Results of Operations, page 33
1. We note your supplemental response to comment 1 of our letter dated [September 23], 2005. Please tell us your basis for characterizing your borrowing to fund a maturing ABS series or conduit as attributable to new securitizations of receivables to the Metris Master Trust.
Response: Metris customer accounts are revolving credit card receivables, not fixed-term receivables. Metris continually finances the revolving receivables through new securitization transactions that have fixed maturities in accordance with market conventions. We therefore have to continually enter into new securitizations to keep the revolving receivables in the Metris Master Trust ("MMT"). Each time a term ABS series matures, the Company enters into another securitization transaction (whether conduit or term ABS) in order to finance the payoff of the maturing term ABS series. The MMT is a master trust as described in paragraph 79 of FAS 140. The Company notes that paragraph 79 of FAS 140 indicates that a new securitization within a master trust occurs when the transferor receives consideration other than beneficial interests in transferred assets. Paragraph 79 states "transfers that result in an exchange of cash, that is... sales of beneficial interests to outside investors, are transfers in exchange for consideration other than beneficial interests in the transferred assets and thus are accounted for as sales". When the Company enters into a new securitization transaction in order to finance a maturing term ABS series, cash is paid by outside investors in exchange for a beneficial interest in the receivables that are held by the MMT.
2. Please tell us why you need to borrow on a new or existing conduit to fund a maturing ABS series or conduit facility. Tell us who initiates the transaction and the contractual provisions related to the maturing or termination of your ABS series and conduit facilities.
Response: Our credit card receivables are revolving in nature, rather than having fixed terms, and do not mature and generate cash upon maturity like fixed-term receivables. In addition, Metris has had limited earnings, cash flow and liquid assets in recent years, resulting in limited amounts of liquidity available to repay maturing term ABS series. Metris therefore has needed to borrow funds or enter into new securitizations in recent years to have cash to repay maturing term ABS series. Metris has also had low corporate credit ratings and a very high cost of corporate debt in recent years. Metris therefore has used new securitizations, which generate a lower cost of funds and higher cash proceeds, instead of corporate borrowings to repay maturing term ABS series.
New securitization debt typically comes in two forms. The first form is term ABS series (typically 2-7 years) issued to institutional investors. The debt is structured to pay floating rate interest monthly and principal upon a predetermined maturity date in a single payment at the end of the term of the debt. The second form is bank conduit facilities (usually less than 1-2 years) provided by a limited number of banks. The bank conduit facilities usually have a few more covenants, tailored more specifically to the current lending environment. As such, repayment terms are usually much more flexible, allowing amounts to be borrowed and repaid at the direction of Metris.
Metris manages the maturities of the term ABS series and the conduits to efficiently utilize the available lending markets. We typically use a conduit transaction to finance a specific term ABS series maturity for a short period of time (usually three to six months) before issuing a longer term ABS series transaction to repay the conduit borrowing. In this way, the conduits act as a true short term "warehouse" to fund maturing ABS term series and hold them for a short time before being re-structured and issued to longer term investors. The proceeds received from the term ABS series are then used to repay the conduit lenders.
New securitization transactions are initiated by Metris. The contractual provisions of both conduit and term ABS series are driven by industry conventions, rating agencies, underwriters and conduit banks, in conjunction with the Company. The conduit agreements permit conduit securitizations to be used to repay maturing term ABS series, but term ABS series agreements do not require them to be repaid through conduit securitizations.
3. Please provide us with a comprehensive example, including cash flows, entities involved, journal entries and supporting calculations, describing how you account for the defeasance of maturing ABS series into your variable funding conduit.
Response: We suggest you review the answer to question #6 first to facilitate your understanding of the inception of a revolving credit card securitization prior to its defeasance as described in this response. Receivables originated on credit cards funded via securitization are immediately sold by the Company to the MMT as described in our response to comment 4 of your letter dated September 23, 2005. Accordingly, when a maturing ABS series is defeased into the variable funding conduit, all journal entries pertain to Metris Receivables, Inc. (MRI), a consolidated subsidiary of Metris, which retains a beneficial interest in receivables sold to MMT.
The new borrowing on the variable funding conduit and the defeasance of the maturing ABS series are transacted and recorded simultaneously. A sample transaction for the first quarter of 2005 reflects the defeasance of term ABS Series 2002-3 into the variable funding conduit on February 1, 2005 (all dollar amounts shown in $000s).
Defease Term ABS Series 2002-3 Face Value of Bonds: Sold Asset Backed Securities $900,000 Contractual Retained Interest 94,475 -------- $994,475 ========
Carrying Amount of Bonds: Contractual Retained Interest $ 94,475 Unaccreted Discount - Contractual Retained Interest - -------- $ 94,475 ========
The initial journal entry for the defeasance records the $900 million cash payment to repay the term ABS Series 2002-3 investors, the maturity of the $94.5 million contractual retained interest held by the Company, and the release of receivable collateral ($994.5 million increase in excess transferor's interest) at MRI.
Journal Entries Excess Transferor's Interest $994,475 Cash $900,000 Contractual Retained Interest 94,475
Receivable collateral was pledged to the variable funding conduit to generate the funds needed to defease term ABS series 2002-3. The collateral required to borrow the $900 million of funding from the variable conduit exceeded the collateral of the maturing transaction due to the higher enhancement level required by the conduit banks. The additional enhancement was in the form of incremental receivable collateral (higher contractual retained interest) and cash (spread reserve deposit).
Draw on variable funding conduit to fund defeasance of term ABS series 2002-3
Carrying Amount of Receivables (Excess Transferor's Interest) $1,104,294
Face Value of Bonds Sold Asset Backed Securities $ 900,000 Contractual Retained Interest $ 204,294 ---------- $1,104,294 ==========
Proceeds from Investor Notes Sold $ 900,000 Less: Spread Reserve Deposit (33,129) ---------- Net Proceeds $ 866,871 ==========
The carrying amount of the sold assets is allocated to each of the assets created from the new securitization based on their relative fair value. <TABLE> Percentage of Allocated Total Fair Carrying Fair Value Value Amount ---------- ------------- ---------- <S> <C> <C> <C> Sold Asset Backed Securities $ 900,000 81% $ 901,140 Contractual Retained Interest 167,210 15% 167,422 Spread Reserve Deposit 27,970 3% 28,006 Interest-only Strip Receivable 7,718 1% 7,727 ---------- ------------- ---------- $1,102,898 100% $1,104,294 ========== ============= ========== </TABLE>
The fair value of the sold asset-backed securities is $900 million, which is equal to the gross proceeds received for the bonds. The methods of determining the fair value of the retained assets, which only relate to receivables that exist and have been sold in accordance with paragraph 78 of FAS 140, are described in note 2 on pages 63 and 64 of our 2004 Form 10-K and are summarized below:
- Contractual retained interests - The 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. In this example: $204,294 / (1+16%/12)^15.12 = $167,210 based on a 16% discount rate and 15.12 months remaining to maturity of the variable funding conduit.
- Spread account receivable - 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. In this example: $33,129 / (1+16%/12)^15.12 = $26,802 based on a 16% discount rate and 15.12 months remaining to maturity of the variable funding conduit, plus $1,168 related to the discounted value of estimated interest earned on the cash balances each month, for a total fair value of $27,970.
- Interest-only strip receivable -The fair value is determined by discounting the expected future excess spread cash flows using a discount rate commensurate with the risks of the underlying assets based on the expected timing of cash flows over the estimated life of the securitization series. In this example: $7,718 is the calculated fair value based on expected future excess spread cash flows discounted at 30% over the 15.12 months remaining to maturity of the variable funding conduit based on a monthly cash flow valuation model.
A loss on sale is calculated as the difference between the proceeds received and the allocated carrying amount of the sold bonds, plus the difference between the allocated carrying amount of the retained assets and their fair value. <TABLE>
Allocated Carrying Amount of Retained Fair Value of Assets Retained Assets ---------------- --------------- <S> <C> <C> Retained Assets: Contractual Retained Interest $ 167,422 $ 167,210 Spread Reserve Deposit 28,006 27,970 Interest-only Strip Receivable 7,727 7,718 ---------------- --------------- $ 203,155 $ 202,898 ================ ===============
</TABLE>
Allocated Carrying Amount of Sold Bonds $ 901,140 Proceeds 866,871 ---------------- Loss on Sale (34,269)
Allocated Carrying Amount of Retained Assets $ 203,155 Fair Value of Retained Assets 202,899 ---------------- Loss on Sale - mark down to fair value $ (256)
Total Loss on Sale $
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
October 18, 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. ("Metris") submits the following information in
response to the Division of Corporation Finance's ("DCF") comment letter dated
October 14, 2005 relating to DCF's review of Metris' 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. Metris and its subsidiaries are referred to herein as "we," "us,"
"our" and "the Company."
Results of Operations, page 33
1. We note your supplemental response to comment 1 of our letter dated
[September 23], 2005. Please tell us your basis for characterizing your
borrowing to fund a maturing ABS series or conduit as attributable to new
securitizations of receivables to the Metris Master Trust.
Response: Metris customer accounts are revolving credit card
receivables, not fixed-term receivables. Metris continually finances
the revolving receivables through new securitization transactions that
have fixed maturities in accordance with market conventions. We
therefore have to continually enter into new securitizations to keep
the revolving receivables in the Metris Master Trust ("MMT"). Each time
a term ABS series matures, the Company enters into another
securitization transaction (whether conduit or term ABS) in order to
finance the payoff of the maturing term ABS series. The MMT is a master
trust as described in paragraph 79 of FAS 140. The Company notes that
paragraph 79 of FAS 140 indicates that a new securitization within a
master trust occurs when the transferor receives consideration other
than beneficial interests in transferred assets. Paragraph 79 states
"transfers that result in an exchange of cash, that is... sales of
beneficial interests to outside investors, are transfers in exchange
for consideration other than beneficial interests in the transferred
assets and thus are accounted for as sales". When the Company enters
into a new securitization transaction in order to finance a maturing
term ABS series, cash is paid by outside investors in exchange for a
beneficial interest in the receivables that are held by the MMT.
2. Please tell us why you need to borrow on a new or existing conduit to
fund a maturing ABS series or conduit facility. Tell us who initiates the
transaction and the contractual provisions related to the maturing or
termination of your ABS series and conduit facilities.
Response: Our credit card receivables are revolving in nature, rather
than having fixed terms, and do not mature and generate cash upon
maturity like fixed-term receivables. In addition, Metris has had
limited earnings, cash flow and liquid assets in recent years,
resulting in limited amounts of liquidity available to repay maturing
term ABS series. Metris therefore has needed to borrow funds or enter
into new securitizations in recent years to have cash to repay maturing
term ABS series. Metris has also had low corporate credit ratings and a
very high cost of corporate debt in recent years. Metris therefore has
used new securitizations, which generate a lower cost of funds and
higher cash proceeds, instead of corporate borrowings to repay maturing
term ABS series.
New securitization debt typically comes in two forms. The first form is
term ABS series (typically 2-7 years) issued to institutional
investors. The debt is structured to pay floating rate interest monthly
and principal upon a predetermined maturity date in a single payment at
the end of the term of the debt. The second form is bank conduit
facilities (usually less than 1-2 years) provided by a limited number
of banks. The bank conduit facilities usually have a few more
covenants, tailored more specifically to the current lending
environment. As such, repayment terms are usually much more flexible,
allowing amounts to be borrowed and repaid at the direction of Metris.
Metris manages the maturities of the term ABS series and the conduits
to efficiently utilize the available lending markets. We typically use
a conduit transaction to finance a specific term ABS series maturity
for a short period of time (usually three to six months) before issuing
a longer term ABS series transaction to repay the conduit borrowing. In
this way, the conduits act as a true short term "warehouse" to fund
maturing ABS term series and hold them for a short time before being
re-structured and issued to longer term investors. The proceeds
received from the term ABS series are then used to repay the conduit
lenders.
New securitization transactions are initiated by Metris. The
contractual provisions of both conduit and term ABS series are driven
by industry conventions, rating agencies, underwriters and conduit
banks, in conjunction with the Company. The conduit agreements permit
conduit securitizations to be used to repay maturing term ABS series,
but term ABS series agreements do not require them to be repaid through
conduit securitizations.
3. Please provide us with a comprehensive example, including cash flows,
entities involved, journal entries and supporting calculations, describing
how you account for the defeasance of maturing ABS series into your
variable funding conduit.
Response: We suggest you review the answer to question #6 first to
facilitate your understanding of the inception of a revolving credit
card securitization prior to its defeasance as described in this
response. Receivables originated on credit cards funded via
securitization are immediately sold by the Company to the MMT as
described in our response to comment 4 of your letter dated September
23, 2005. Accordingly, when a maturing ABS series is defeased into the
variable funding conduit, all journal entries pertain to Metris
Receivables, Inc. (MRI), a consolidated subsidiary of Metris, which
retains a beneficial interest in receivables sold to MMT.
The new borrowing on the variable funding conduit and the defeasance of
the maturing ABS series are transacted and recorded simultaneously. A
sample transaction for the first quarter of 2005 reflects the
defeasance of term ABS Series 2002-3 into the variable funding conduit
on February 1, 2005 (all dollar amounts shown in $000s).
Defease Term ABS Series 2002-3
Face Value of Bonds:
Sold Asset Backed Securities $900,000
Contractual Retained Interest 94,475
--------
$994,475
========
Carrying Amount of Bonds:
Contractual Retained Interest $ 94,475
Unaccreted Discount - Contractual Retained Interest -
--------
$ 94,475
========
The initial journal entry for the defeasance records the $900 million
cash payment to repay the term ABS Series 2002-3 investors, the
maturity of the $94.5 million contractual retained interest held by the
Company, and the release of receivable collateral ($994.5 million
increase in excess transferor's interest) at MRI.
Journal Entries
Excess Transferor's Interest $994,475
Cash $900,000
Contractual Retained Interest 94,475
Receivable collateral was pledged to the variable funding conduit to
generate the funds needed to defease term ABS series 2002-3. The
collateral required to borrow the $900 million of funding from the
variable conduit exceeded the collateral of the maturing transaction
due to the higher enhancement level required by the conduit banks. The
additional enhancement was in the form of incremental receivable
collateral (higher contractual retained interest) and cash (spread
reserve deposit).
Draw on variable funding conduit to fund defeasance of term ABS series
2002-3
Carrying Amount of Receivables
(Excess Transferor's Interest) $1,104,294
Face Value of Bonds
Sold Asset Backed Securities $ 900,000
Contractual Retained Interest $ 204,294
----------
$1,104,294
==========
Proceeds from Investor Notes Sold $ 900,000
Less: Spread Reserve Deposit (33,129)
----------
Net Proceeds $ 866,871
==========
The carrying amount of the sold assets is allocated to each of the
assets created from the new securitization based on their relative fair
value.
<TABLE>
Percentage of Allocated
Total Fair Carrying
Fair Value Value Amount
---------- ------------- ----------
<S> <C> <C> <C>
Sold Asset Backed Securities $ 900,000 81% $ 901,140
Contractual Retained Interest 167,210 15% 167,422
Spread Reserve Deposit 27,970 3% 28,006
Interest-only Strip Receivable 7,718 1% 7,727
---------- ------------- ----------
$1,102,898 100% $1,104,294
========== ============= ==========
</TABLE>
The fair value of the sold asset-backed securities is $900 million,
which is equal to the gross proceeds received for the bonds. The
methods of determining the fair value of the retained assets, which
only relate to receivables that exist and have been sold in accordance
with paragraph 78 of FAS 140, are described in note 2 on pages 63 and
64 of our 2004 Form 10-K and are summarized below:
- Contractual retained interests - The 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. In this example: $204,294 /
(1+16%/12)^15.12 = $167,210 based on a 16% discount rate and 15.12
months remaining to maturity of the variable funding conduit.
- Spread account receivable - 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. In this
example: $33,129 / (1+16%/12)^15.12 = $26,802 based on a 16%
discount rate and 15.12 months remaining to maturity of the
variable funding conduit, plus $1,168 related to the discounted
value of estimated interest earned on the cash balances each
month, for a total fair value of $27,970.
- Interest-only strip receivable -The fair value is determined by
discounting the expected future excess spread cash flows using a
discount rate commensurate with the risks of the underlying assets
based on the expected timing of cash flows over the estimated life
of the securitization series. In this example: $7,718 is the
calculated fair value based on expected future excess spread cash
flows discounted at 30% over the 15.12 months remaining to
maturity of the variable funding conduit based on a monthly cash
flow valuation model.
A loss on sale is calculated as the difference between the proceeds
received and the allocated carrying amount of the sold bonds, plus the
difference between the allocated carrying amount of the retained assets
and their fair value.
<TABLE>
Allocated Carrying
Amount of Retained Fair Value of
Assets Retained Assets
---------------- ---------------
<S> <C> <C>
Retained Assets:
Contractual Retained Interest $ 167,422 $ 167,210
Spread Reserve Deposit 28,006 27,970
Interest-only Strip Receivable 7,727 7,718
---------------- ---------------
$ 203,155 $ 202,898
================ ===============
</TABLE>
Allocated Carrying Amount of Sold Bonds $ 901,140
Proceeds 866,871
----------------
Loss on Sale (34,269)
Allocated Carrying Amount of Retained Assets $ 203,155
Fair Value of Retained Assets 202,899
----------------
Loss on Sale - mark down to fair value $ (256)
Total Loss on Sale $