M&A Card Portfolio Sale

Portfolio M&A Process


M&A Card Portfolio Sale, A Simple Matter?

To the uninitiated, many think that if one manages a credit card portfolio sale or purchase (or any business enterprise for that matter), after proper due diligence by each counter-party and acceptance of the counter-party’s final binding bid, you sign an agreement and that’s that.  Closing is imminent.  The M&A process for a credit card portfolio sale is not quite that easy.  With a history of over 150 card valuations and card portfolio buy/sell merger transactions, here is what R.K. Hammer experience shows:

After a preliminary non-binding LOI (“Letter of Intent”) by bidders, on site due diligence for two or more finalists, and a final, binding LOI is agreed to, you then each “lawyer-up.”  This, to craft the S & P (“Sale and Purchase Agreement”), plus an Interim Servicing Agreement (post-closing, pre-conversion), and in most cases also an ongoing Agent Card Agreement (for generating new card accounts at the Seller’s, for which they receive a one-time per active account bounty of between $20 – $75; plus annually, some agreed bps on net cardholder sales volume for new accounts generated post-sale).

Card Portfolio Sale

As an example of what all that activity means in terms of workload and time-burn, read on:

Our last card portfolio sale, the M&A process took fourteen days to get required NDA’s done, the written card deal Offering Memorandum out to interest bidders, and to see “preliminary non-binding offers” on the table.

Another fourteen days for offer negotiation, due diligence on site and “final binding offers” to come in.

The subsequent card Sale and Purchase Agreement was 49 pages long, plus 21 Exhibits.  Took ten days, non-stop back and forth “redline revisions” by both parties.

The Interim Card Servicing Agreement was 23 pages long, plus 12 Exhibits. Simultaneously, took five days to complete.  Lots of calls.

The Ongoing Agent Card Agreement was 24 pages long, and had 12 Scheduled Attachments. Simultaneously, took five days to complete.

That’s a lot of negotiating and “wordsmithing.”  Not nearly as simple as some may think.  You not only have to negotiate the initial and final Letter of Intent with the counter party, but then each side has their attorney craft or respond to the initial draft Agreements shown above (often multiple iterations before completion); a series of at least six Agreements/documents each of which have to be negotiated  line by line, word by word.  If you add a commercial card portfolio segment to the consumer card portfolio sale, then the contracts double in number to twelve.

So, start to finish (Letter of Intent to Closing) the quickest period involved for all the steps in any card deal we have been involved in was only 21 days (mortals can only go so long without REM sleep).  That was very unusual, though.  

More often it takes 45 – 60 days to get from LOI to Closing, and in our experience an average of another 120 days post-closing (the “Interim Period”) to finally transfer the portfolio’s card account servicing to the buyer’s accounting and data processing system (the deal “Conversion Period”).

Then – and only then – can you say the M&A process is really done.   Catching your breath, coming up for air, and saying “hello” to your family once again.  That’s the way I see it.

Never fear, if you forget any or all of this, your attorney and your investment banker will walk your team through every step of the way.

Robert Hammer is CEO at R.K. Hammer

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Credit Card Segments

Definitions of various credit card segments differ based upon what risk levels card organizations accept.  That can even change within an organization over time, as strategies change.  For example, the following bandwidth ranges are used by R.K. Hammer and others; but not all card issuers, as different card issuers don’t have identical risk appetites, which then set their own acceptable bandwidth definitions:

Credit Card Segments in the R.K. Hammer Model

Segment FICO
Super Prime: >760
Prime: 700 – 760
Near Prime: 670 – 699
Prepaid: 650 – 669
Private Label: 640 – 649
Subprime: <640

“FICO (NYSE: FICO) is a software company based in San Jose, California and founded by Bill Fair and Earl Isaac in 1956. Its FICO score, a measure of consumer credit risk, has become a fixture of consumer lending in the United States”- Wikipedia

Naturally, other factors in one’s credit policy will drive applicants to one segment or another, not just FICO’s.  These, too, vary by organization, as do their respective cardholder pricing models.

Might certain card organizations define these credit card segments differently?  Of course.  It all depends on their view of credit risk at the time, and their present and trending loan loss numbers.  Categories and associated FICO’s can also overlap for segments within the total portfolio, just as credit policy and criteria can evolve over time, too.   Revolving credit has become both art and science.

We have some prime card issuing clients who won’t touch an applicant with less than 720 FICO.  Others who like higher risk accounts (and the fee revenue that comes with them) want all the 640 FICO’s they can get in their subprime portfolio segment.  It just depends on their strategies, objectives, risk appetite and markets.  

No one is right or wrong; whatever gets their hurdle rates achieved for satisfying IRR and EBITDA.  The key, we believe, is “Your data and your definition, consistently applied.”