Business Context and Reporting Period
Company: CompuCredit Holdings Corporation (formerly CompuCredit Corporation, reorganized June 30, 2009)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: A provider of credit and financial services to the financially underserved ("sub-prime") market. Operations include credit cards, retail and internet micro-loans, auto finance, and investments in previously charged-off receivables. The company is currently in a contraction phase due to severe liquidity market disruptions, having closed substantially all credit card accounts to new purchases and curtailed auto loan originations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Total Interest Income | $18,312 | $57,661 | $24,527 | $75,782 |
| Net Interest Income & Fees (Non-securitized) | $51,025 | $122,928 | $37,686 | $130,268 |
| Loss on Securitized Earning Assets | $(216,416) | $(530,130) | $4,238 | $(13,830) |
| Net Loss (Continuing Ops) | $(238,633) | $(495,641) | $(32,557) | $(81,151) |
| Net Loss (Total) | $(238,633) | $(499,930) | $(33,808) | $(87,066) |
| Net Loss Attributable to Controlling Interests | $(239,411) | $(486,272) | $(33,778) | $(88,537) |
| Loss Per Share (Basic & Diluted) | $(5.02) | $(10.20) | $(0.71) | $(1.86) |
| Cash and Cash Equivalents | $119,595 | $119,595 | $94,428 | $137,526 |
| Total Assets | $729,472 | $729,472 | $1,525,111 | $1,698,725 |
| Total Liabilities | $475,329 | $475,329 | $778,254 | $778,254 |
| Shareholders' Equity | $238,268 | $238,268 | $721,979 | $746,857 |
Material Changes vs. Prior Period
- Significant Losses on Retained Interests: The company recognized a massive loss of $334.0 million (Q3) and $657.9 million (YTD) on retained interests in securitized credit card receivables. This was driven by a change in valuation assumptions reflecting the high risk of "early amortization" of securitization facilities due to worsening payment rates and economic conditions.
- Securitization Gain: A one-time gain of $114.0 million was recognized in Q3 2009 from the purchase and cancellation of $264.0 million in securitization facility notes for $150.0 million.
- Encore Settlement: The company settled a dispute with Encore Capital Group regarding a forward flow contract for charged-off receivables. This resulted in a net pre-tax gain of $11.0 million and the recognition of $21.2 million in previously deferred revenue.
- Goodwill Impairment: A $20.0 million goodwill impairment charge was recorded in Q2 2009 related to the Retail Micro-Loans segment, following the decision to discontinue Arkansas operations.
- Asset Contraction: Total assets decreased by approximately 52% from December 31, 2008 ($1.53 billion) to September 30, 2009 ($729 million), primarily due to the liquidation of securitized earning assets and non-securitized loans.
- Debt Repayment: The company repaid $81.1 million of notes payable in the Auto Finance segment in Q3 2009 due to an inability to renew facilities on satisfactory terms.
Guidance, Outlook, and Risks
- Liquidity Constraints: Management states that traditional securitization markets remain disrupted. The company has no meaningful access to new liquidity for origination and is managing a contraction of its business to preserve cash. Unrestricted cash was $116.0 million as of September 30, 2009.
- Early Amortization Risk: There is a heightened risk that upper and lower-tier originated portfolio master trusts will enter early amortization. If this occurs, cash flows to the company would be limited to servicing fees, which are insufficient to cover current overhead costs, potentially leading to further asset impairments.
- Accounting Changes (2010): New accounting rules (effective Jan 1, 2010) will require the consolidation of securitization trusts. Management is uncertain if this will have favorable or adverse effects depending on whether they exercise the fair value option, but notes that without the fair value option, equity could be substantially reduced.
- Operational Outlook: The company expects continued declines in managed receivables, servicing income, and ancillary revenues. It plans to reduce overhead infrastructure to match reduced cash flows. Growth is not anticipated in the near term.
- Legal Proceedings: Significant litigation includes a class action regarding "payday lending" practices in North Carolina, a dispute with Columbus Bank and Trust (CB&T) regarding rebates and account management, and a securities class action alleging false statements regarding assets and loan losses.
Investor Verification Checklist
- Valuation Assumptions: Verify the sensitivity of the "retained interests" valuation to changes in payment rates, default rates, and the "early amortization" assumption, as these drove the majority of the Q3 loss.
- Liquidity Runway: Assess the sufficiency of the $116 million unrestricted cash balance against upcoming debt maturities (specifically the $28.8 million JRAS facility due Jan 2010) and the ability to cover fixed overhead if securitization facilities enter early amortization.
- Encore Settlement Terms: Confirm the long-term impact of the Encore settlement on the "Investments in Previously Charged-Off Receivables" segment, specifically regarding the loss of the fixed-price forward flow contract and the shift to holding assets on the balance sheet.
- 2010 Accounting Impact: Monitor the company's decision regarding the "fair value option" for the new consolidation rules effective in 2010, as this will materially alter the balance sheet presentation and potentially equity levels.
- Legal Exposure: Track the status of the CB&T litigation and the North Carolina class action, as adverse outcomes could result in significant damages or forced changes to business practices.