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Rating Action:

MOODY'S UPGRADES METRIS COMPANIES (SENIOR UNSECURED TO B3)

13 Apr 2005
MOODY'S UPGRADES METRIS COMPANIES (SENIOR UNSECURED TO B3)

Approximately $100 Million of Debt Securities Affected

New York, April 13, 2005 -- Moody's Investors Service today raised the ratings of Metris Companies, Inc. (senior unsecured to B3 from Caa2) and its bank subsidiary Direct Merchants Credit Card Bank NA (issuer to Ba3 from B1). The rating outlook is stable. The rating agency said the upgrade reflects the improvements in Metris's asset quality. These improvements have led to positive earnings at the company as well as the release of trapped cash from its securitization conduits, and have also bolstered ABS investor confidence, giving the company improved access to the securitization market and greater funding flexibility. The ratings action concludes a ratings review begun on January 13, 2005.

The confidence of Metris' bank regulator, the Office of the Comptroller of the Currency (OCC) has also improved, Moody's noted. This was demonstrated by the recently announced amendment to Direct Merchants' Operating Agreement with the OCC, which will permit the bank to pay a $130 million special dividend to the parent company. The OCC also concluded its investigation into Metris' executive compensation and reimbursement practices without any adverse findings. Although an investigation by the SEC and an IRS audit remain outstanding, Moody's concluded that these matters are not a barrier to the ratings upgrade.

The rating agency said the B3 rating for Metris' senior unsecured notes reflects the parent company's stronger cash flows and increased access to funding. These factors clearly reduce the default risk for parent company creditors. The Ba3 issuer rating for Direct Merchants also reflects this reduction in default risk, as well as the still substantial protections provided to bank creditors by the Operating Agreement. Moody's noted that Direct Merchants' special dividend benefits creditors of Metris more than creditors of the bank, which explains the narrowing of the ratings differential between Metris and Direct Merchants. Moody's still believes that the potential severity of loss given default for creditors at Direct Merchants remains significantly lower than it would be for creditors at Metris itself.

Moody's noted that while cash flow has improved, profitability at Metris remains weaker than peers. In addition, were Metris to lose access to market funding its sources of alternative liquidity are still limited. This situation is exacerbated by the relatively short maturity of its securitizations and on-balance sheet funding. Finally, Moody's believes that Metris will face significant challenges satisfying shareholder demands for earnings growth given its lack of diversification, its modest scale relative to U.S. credit card industry leaders, and the limited growth opportunities currently challenging the entire credit card industry. These challenges could pressure management to pursue a riskier strategy, to the detriment of bondholders.

The rating agency said future ratings upgrades will depend upon Metris' ability to improve its profitability to peer levels, to generate sustainable growth without increasing its risk profile, and to extend the maturity of its funding profile and improve its alternative liquidity. Ratings downgrades could occur if profitability, underwriting standards, asset quality, or financial flexibility were to deteriorate.

The following ratings were upgraded:

Metris Companies Inc. -- the rating for the senior unsecured notes due July 2006 to B3 from Caa2.

Direct Merchants Credit Card Bank, N.A. -- the rating of the bank for long-term deposits to Ba2 from Ba3; the issuer rating and rating for other senior long-term obligations to Ba3 from B1; and the financial strength rating to D from D-.

Metris Companies Inc., headquartered in Minnetonka, Minnesota, is the thirteenth largest general purpose credit card issuer in U.S. and had total managed receivables of $6.6 billion as of December 31, 2004.

New York
David Fanger
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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