More Credit Woes at AmeriCredit, Metris

Updated numbers belie the recent rallies in these stocks.
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Time to wade back into the subprime swamp for an update on those unlovely creatures,

AmeriCredit

(ACF)

and

Metris

(MXT)

.

After a steep slide, AmeriCredit's stock has soared over the past week, indicating that investors are regaining confidence in the company, which lends to people with tainted credit histories, or subprime borrowers.

But recently released credit data for October show a rising number of bad-loan losses and delinquencies, and they suggest AmeriCredit is allowing troubled lenders to extend more loans, according to a report released Tuesday by Ventana Capital, a New York-based brokerage.

In the report, Ventana's Bill Ryan shows that recent loans are performing worse than older credits, and this undermines AmeriCredit's assertion that its credit-scoring model enables it to pick better borrowers. (Ventana does no underwriting, and Ryan rates AmeriCredit a sell.)

The Fort Worth, Texas-based lender didn't return a request for comment. This reporter was intending to bring up credit-quality issues at the company's investor briefing in New York, scheduled for Wednesday, but AmeriCredit said Detox wasn't allowed to attend. Maybe this was due to a less-than-positive look at the company in

late September.

AmeriCredit jumped $4.49 to $24.25 Tuesday, taking its one-week gain to 60%. However, the stock is still down more than 60% from its 52-week high, amid fears that the economic slowdown will cause higher bad-loan losses.

Bad Moon Rising

And bad loans

are

on the rise. (Ryan gained a name for himself for spotting problems at

Conseco

when he was an analyst at Salomon Smith Barney.) After nine months in existence, cumulative loan losses were an average of 1.96% on loans sold off to investors in 2001. (In a process called securitization, AmeriCredit sells loans to investors in the form of bonds.) That loss number is substantially higher than the figures for 2000 and 1999 securitizations when they were 9 months old.

Also startling is the increase in the loss on defaulted loans that AmeriCredit suffers after factoring in money it recovers from selling repossessed cars. Proportionately, the company is recovering less through repo sales, which reflects the fall in used-car prices, caused in part by the 0% financing offered by loan companies owned by the automakers.

In October, AmeriCredit's so-called loss severity on its defaulted loans rose to 65.7% for 2000 securitizations, up from 63.2% in September and way higher than the 58.5% registered six months earlier.

On average, loans more than 60 days past due were sequentially higher in October on 16 of the 18 loan pools that Ryan looked at. Meanwhile, loans 30 to 59 days past due also went up. Securitizations done in 2001 and 2000 are still showing some of the worst delinquency-plus-repo figures seen in AmeriCredit's history. For example, delinquent loans plus loans on repossessed cars totaled 3.81% on 2001 securitizations after nine months, which is far worse than previous securitizations, according to Ryan's analysis.

In fact, the credit quality data could be a lot worse if AmeriCredit weren't increasingly allowing struggling borrowers to miss payments. (For a fee, the company allows borrowers to skip payments, which are then added to the principal of the loan.) Loan extensions rose on nearly all of the 18 AmeriCredit securitizations Ryan examined. Extension fees as a percentage of loans extended are still far lower on 2001 securitizations, compared with previous years.

And to All a Good Night

Now for credit card lender Metris, whose stock powered 14% higher Tuesday. To quell rising fears about credit quality, it recently trumpeted a decline in a closely watched bad-loan indicator. But the drop may have been achieved, at least in part, by shifting loans. (Metris didn't respond to several requests for comment.)

The figure in question is the bad-loan ratio for something called the Metris master trust, which contains securitized credit card loans. In the third quarter, about 70% of Metris' $11 billion of loans were in its public master trust.

Each month, the master trust has to say how many of its loans have defaulted on an annualized basis. In what is called the charge-off ratio, that default figure is expressed as a percentage of the total loan receivables in the trust.

As this column noted Oct. 24, September's charge-off ratio jumped to 13.81%. The next day, Metris issued a press release in which Vice Chairman David Wesselink predicted that the ratio would fall to 12.5% in October. When the number came out on Nov. 6, it was 12.2%. Bullish analysts cheered, and Metris officials have been pointing to this number in recent presentations to investors.

This drop suggests a positive outlook for Metris. However, when looking at this charge-off ratio, investors need to track how many loans are going into the master trust each month. If a trust has $1,000 of loans and $100 of losses in month one, its charge-off ratio is 10%. In month two, if losses rise to $110 and the loan total stays the same, the ratio goes to 11%. But if loans increase to $1,200 because $200 of new loans were added, and losses rise to $110, then the ratio actually drops to 9.2%. (A drop in the loss ratio could also mean that the loss rate of the added loans was markedly better than the existing ones in the trust.)

In October, Metris added $379 million to receivables, the highest monthly addition to the trust this year. This brought the master trust total to $8.74 billion. These could've been new loans or acquired loans; it's hard to tell exactly where they come from. But the addition should lead investors to be cautious about Metris' boast.