``It would be like lending to people in prison,'' said Reilly Tierney, an analyst at Fox-Pitt, Kelton Inc. who follows credit- card companies such as MBNA Corp. ``I think they (Gateway) have a distressed lending business,'' he said.
Gateway's Loss Reserves Soar as Company Taps Riskier Customers
Washington, March 7 (Bloomberg) -- Gateway Inc.'s reserves for loan losses soared last year as the computer manufacturer sought to expand sales among customers with riskier credit.
The San Diego-based company set aside $121.9 million for consumer-loan losses last year, compared with $4.7 million the year before, according to documents filed with the Securities and Exchange Commission. The provision increased because Gateway made more loans and extended the financing program to ``higher risk categories,'' the third-largest supplier of PCs to consumers said in a regulatory filing.
The change may have helped Gateway maintain sales growth for much of last year, as slower industry sales hit rivals such Hewlett-Packard Co. and Compaq Computer Corp. in the second half of 2000. Gateway's bad-debt provision equaled about 25 percent of the $480 million in loans the company added to its books last year -- an unusually high ratio, according to several analysts.
``It would be like lending to people in prison,'' said Reilly Tierney, an analyst at Fox-Pitt, Kelton Inc. who follows credit- card companies such as MBNA Corp. ``I think they (Gateway) have a distressed lending business,'' he said.
Consumer-financing receivables at Gateway more than doubled last year to $779 million from $299 million, while total sales rose 7 percent to $9.6 billion, according to the SEC filings.
Financing
PC manufacturers traditionally have offered financing to bolster demand, according to analysts. Gateway may have expanded the number of potential customers by making credit available to people who couldn't get loans from finance partners such as MBNA.
While Gateway offers financing through partner MBNA, the computer company in 1999 decided also to make loans directly to customers. With annual interest rates on such loans running as high as 28 percent, Gateway views the direct-financing program as one way to diversify its revenue streams as PC prices fall.
Collecting loan payments each month also lets Gateway keep in close touch with customers to track when they want to replace a computer, according to spokesman John Spelich. Expanding the loan program to riskier borrowers helped the company ``broaden the availability of technology to those who could qualify for it,'' Spelich said.
The $121.9 million set-aside for consumer-loan losses equaled almost 16 percent of consumer-financing receivables outstanding as of Dec. 31, 2000. The company charged off $51 million of loans against the set-aside provision during the year, lowering the total allowance to $75 million as of Dec. 31, or about 9.6 percent of gross receivables, the filing showed.
Conservative Reserves
Jordan Hymowitz, an analyst at Robertson Stephens Inc. who tracks consumer-finance businesses such as Metris Cos., noted that Gateway was being conservative in setting aside a reserve that was more than twice as large as actual charge-offs.
Gateway bases its loan-loss reserves in part on the experience of partners such as MBNA, according to spokesman Spelich, who said the company will continue to offer loans directly to consumers.
Several analysts questioned whether Gateway should be making loans. An alternative is the approach used by rival Dell Computer Corp., which makes loans available to consumers through a finance venture rather than keeping the IOUs on its own balance sheet.
Consumer lending is a specialized business, these analysts said, requiring a high volume of loans and sophisticated credit scoring tools in order to generate profits.
``For a company like Gateway to actually have taken a note is stupid because they just don't have the skill or expertise to be a major lending source,'' said Seymour Merrin, president of Merrin Information Services Inc., a Santa Fe, New Mexico, consulting company on high-tech marketing and distribution.
The consumer-financing program could change under Ted Waitt, the Gateway founder who replaced Jeff Weitzen as chief executive earlier this year. While Gateway emphasized its services business to diversify revenue under Weitzen, Waitt last month said the company must make sure it devotes proper attention to selling computers profitably.
On Feb. 16, Gateway sold about $500 million of the finance receivables -- consisting of its higher-rated credits -- to a loan servicing partner at book value. That reduced total consumer financing receivables to about $300 million, according to the company's annual report.
``The new management is taking a more conservative approach to financing,'' said David Bailey, an analyst who follows Gateway for Gerard Klauer Mattison. ``It appears they will not be as aggressive in doing their own financing going forward as they have been in the past.''
Mar/07/2001 15:58 ET
For more stories from Bloomberg News, click here.
(C) Copyright 2001 Bloomberg L.P. |
