ATLC

Business Context and Reporting Period

Company: CompuCredit Holdings Corporation (formerly CompuCredit Corporation, reorganized June 30, 2009).
Reporting Period: Fiscal year ended December 31, 2009.
Business Overview: A provider of credit and financial services to the sub-prime market. Operations are divided into five segments: Credit Cards, Investments in Previously Charged-Off Receivables, Retail Micro-Loans, Auto Finance, and Internet Micro-Loans.
Key Strategic Shift: The company is in a contraction phase due to severe liquidity market disruptions. It has ceased credit card marketing, closed substantially all credit card accounts to new purchases, and is evaluating a spin-off of its micro-loan businesses into a separate entity named "Purpose Financial."

Key Financial Metrics

Note: The 2009 results include a $114.0 million securitization gain and an $11.0 million gain from the settlement of a dispute with Encore Capital Group, which partially offset significant operating losses.

Material Changes vs. Prior Period

• Revenue Contraction: Total interest income declined 22% due to the liquidation of auto finance receivables and the cessation of credit card originations. Servicing income dropped 42% as credit card portfolios shrank.
• Significant Losses: The company recorded a $676.2 million loss on retained interests in securitized credit card receivables, driven by deteriorating economic conditions, higher delinquency rates, and revised valuation assumptions regarding early amortization of securitization trusts.
• Goodwill Impairments: A $20.0 million goodwill impairment charge was recorded for the Retail Micro-Loans segment following the closure of Arkansas operations and depressed market valuations.
• Foreign Currency Losses: Foreign currency transaction losses increased to $28.5 million (from $1.6 million in 2008), including a $26.1 million reclassification of accumulated translation losses related to the U.K. portfolio.
• Asset Base Reduction: Total assets decreased by approximately 51% year-over-year, reflecting the liquidation of securitized earning assets and the de-securitization of lower-tier credit card receivables.

Guidance, Outlook, and Risks

Outlook: Management expects continued contraction in credit card and auto finance receivables. The company is focusing on cost-cutting to align expenses with reduced servicing cash flows. Modest growth is anticipated in the Internet Micro-Loans segment (U.K. and U.S.) and the Investments in Previously Charged-Off Receivables segment.

Strategic Initiatives:

• Spin-Off: Evaluating the spin-off of U.S. and U.K. micro-loan businesses (Purpose Financial) to improve access to capital and banking relationships.
• Dividends: Paid a $0.50 per share cash dividend on December 31, 2009, and is considering future distributions if investment opportunities are unavailable.
• Debt Repurchases: Actively pursuing repurchases of convertible senior notes at discounts to face value.

Key Risks:

• Liquidity Constraints: Inability to access traditional securitization markets limits growth and forces reliance on cash reserves and expensive alternative financing.
• Regulatory Environment: Significant exposure to state and federal regulations regarding micro-loans (e.g., APR caps, database requirements) and credit card practices (CARD Act).
• Asset Quality: High delinquency and charge-off rates in the sub-prime portfolio, exacerbated by the economic downturn and unemployment.
• Accounting Changes: New accounting rules effective January 1, 2010, will require the consolidation of securitization trusts, altering the presentation of assets, liabilities, and cash flows.

Investor Verification Checklist

• Liquidity Sufficiency: Verify if the $185 million in unrestricted cash is sufficient to cover operating expenses and debt service obligations given the lack of new securitization funding.
• Spin-Off Viability: Confirm the status of the Purpose Financial spin-off, including regulatory approvals and the potential tax implications for shareholders.
• Valuation of Retained Interests: Scrutinize the assumptions used to value retained interests in securitized assets, as these are highly sensitive to discount rates and payment rate estimates.
• Regulatory Compliance: Monitor ongoing litigation and regulatory actions, particularly regarding micro-loan operations in key states (e.g., Ohio, South Carolina) and the U.K.
• Debt Covenants: Review the status of the JRAS auto finance debt facility, which was in covenant violation as of year-end, and the terms of the new ACC debt facility.