May 12, 2009
Advanta’s Card-Lending Shutdown May Imperil Customers
Advanta Corp., the credit-card issuer for small businesses, may leave 1 million customers scrounging to find new lenders and debt holders facing losses of 35 percent after the company shut down accounts to preserve capital.
Advanta will cease lending June 10 after uncollectible debt reached 20 percent as of March 31, according to a statement and filings yesterday by the Spring House, Pennsylvania-based firm. The lender earmarked $1.4 billion to buy back securitized card loans with offers of 65 cents to 75 cents on the dollar.
Credit-card company profits suffered as the recession pushed U.S. unemployment to 8.9 percent in April. Defaults on cards historically track the jobless rate, and analysts have been concerned that the industry’s average for bad loans would breach 10 percent and set a record. Advanta decided to cut off customers after “charge-offs” rose to twice that threshold, from 9.6 percent at year-end.
“The question is how many business owners depend solely on their Advanta credit card,” said William Dunkelberg, chief economist at the National Federation of Independent Business. While most probably have other sources of credit, self-employed entrepreneurs may have trouble getting a new card, he said. “Credit is harder to find than it’s ever been in this expansion,” said Dunkelberg, whose biography lists him as a former Advanta director.
Stock Declines
The company’s A-shares dropped 28 cents, or 25 percent, to 85 cents at 4 p.m. in Nasdaq Stock Market trading. Advanta, which had $2.4 billion in deposits as of March 31, reported three consecutive quarterly losses and its shares have plunged from about $30 in June 2007. The recession affected Advanta’s customers across the country, Chief Financial Officer Philip Browne has said.
“We’ll be shutting down accounts for future transaction activities, but many of the customers will maintain balances and pay us off over time,” Browne said yesterday in a telephone interview. “We’ll have to service and collect on that, and that will be the first order of business for the company.”
More than 90 percent of Advanta’s small business customers will have “adequate” access to alternative credit after the company halts lending, Browne said.
Citing the recession, Advanta said it’s planning to “maximize capital and dramatically reduce risk.” While the company has “no indication” if debt investors will accept the buyback offer, the price is “relatively consistent with recent trading levels of the bonds,” Browne said.
No Public Actions
Advanta’s credit-card unit is chartered and regulated in Utah and has “no corrective actions that are public,” said G. Edward Leary, the state commissioner of financial institutions. He declined to say whether any non-public actions were taken against the company.
This would be the first so-called early amortization of a trust since 2003, according to JPMorgan Chase & Co. analyst Christopher Flanagan.
“Early amortization has been viewed as a catastrophic event for issuers,” Scott Valentin, an analyst at Friedman Billings Ramsey & Co., said today in a research note. Advanta’s filing said that the charge-off rate for uncollectible loans may increase after accounts are closed. Valentin said that’s likely because “the cards have substantially less utility to cardholders,” cutting the incentive to keep up with payments.
“They’re hoping they can stay alive barely until the environment changes,” said David Robertson, president of the Nilson Report, the Carpinteria, California-based industry newsletter. This is “a big sign that the credit-card industry has problems that are going to be around for several years.”
Workforce Slashed
Advanta was the 11th-biggest U.S. credit-card issuer at the end of 2008 with about $5 billion in outstanding balances, and the only major lender focused on small business borrowers, Robertson said. In the first quarter the company slashed the workforce by about 300 employees, or 36 percent, from 841 as of Dec. 31, 2008. Calls inquiring about the future of current employees weren’t returned.
The company’s woes aren’t likely to spread to other asset- backed issuers, said JPMorgan’s Flanagan. Advanta’s “precarious liquidity and capital position” make the lender more vulnerable to deteriorating credit than its stronger counterparts, Flanagan said in a May 8 report.
Credit-card companies can take steps to protect investors and avoid having to wind down trusts, including removing overdue accounts from the pool and increasing the cash cushion that comes with the securities to shield bondholders from losses. Bank of America Corp., Citigroup Inc., General Electric Co. and JPMorgan have already taken steps to protect their securitized assets as delinquencies surge, according to JPMorgan data.
Needs Capital
Advanta relied on the asset-backed securities market for funding, and has been unable to raise cash through securitization since June 2008, according to Bloomberg data. It is shut out of the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, because of ratings cuts on its bonds.
Credit card-backed debt eligible for purchase with TALF loans must be rated AAA. Moody’s Investors Service has assigned “junk” ratings to Advanta’s senior unsecured and subordinated debt. The trust preferred securities rating of Advanta Capital Trust I was cut to C from Caa3 in April by Moody’s, citing a “high degree of uncertainty” that investors will get repaid because of Advanta’s “weak financial condition.”
Today, Standard & Poor’s cut its rating on Advanta to CC from CCC and assigned a negative outlook to the company.
Source:
Bloomberg.com
By Sarah Mulholland and Cordell Eddings
Advanta’s Card-Lending Shutdown May Imperil Customers
Advanta Corp., the credit-card issuer for small businesses, may leave 1 million customers scrounging to find new lenders and debt holders facing losses of 35 percent after the company shut down accounts to preserve capital.
Advanta will cease lending June 10 after uncollectible debt reached 20 percent as of March 31, according to a statement and filings yesterday by the Spring House, Pennsylvania-based firm. The lender earmarked $1.4 billion to buy back securitized card loans with offers of 65 cents to 75 cents on the dollar.
Credit-card company profits suffered as the recession pushed U.S. unemployment to 8.9 percent in April. Defaults on cards historically track the jobless rate, and analysts have been concerned that the industry’s average for bad loans would breach 10 percent and set a record. Advanta decided to cut off customers after “charge-offs” rose to twice that threshold, from 9.6 percent at year-end.
“The question is how many business owners depend solely on their Advanta credit card,” said William Dunkelberg, chief economist at the National Federation of Independent Business. While most probably have other sources of credit, self-employed entrepreneurs may have trouble getting a new card, he said. “Credit is harder to find than it’s ever been in this expansion,” said Dunkelberg, whose biography lists him as a former Advanta director.
Stock Declines
The company’s A-shares dropped 28 cents, or 25 percent, to 85 cents at 4 p.m. in Nasdaq Stock Market trading. Advanta, which had $2.4 billion in deposits as of March 31, reported three consecutive quarterly losses and its shares have plunged from about $30 in June 2007. The recession affected Advanta’s customers across the country, Chief Financial Officer Philip Browne has said.
“We’ll be shutting down accounts for future transaction activities, but many of the customers will maintain balances and pay us off over time,” Browne said yesterday in a telephone interview. “We’ll have to service and collect on that, and that will be the first order of business for the company.”
More than 90 percent of Advanta’s small business customers will have “adequate” access to alternative credit after the company halts lending, Browne said.
Citing the recession, Advanta said it’s planning to “maximize capital and dramatically reduce risk.” While the company has “no indication” if debt investors will accept the buyback offer, the price is “relatively consistent with recent trading levels of the bonds,” Browne said.
No Public Actions
Advanta’s credit-card unit is chartered and regulated in Utah and has “no corrective actions that are public,” said G. Edward Leary, the state commissioner of financial institutions. He declined to say whether any non-public actions were taken against the company.
This would be the first so-called early amortization of a trust since 2003, according to JPMorgan Chase & Co. analyst Christopher Flanagan.
“Early amortization has been viewed as a catastrophic event for issuers,” Scott Valentin, an analyst at Friedman Billings Ramsey & Co., said today in a research note. Advanta’s filing said that the charge-off rate for uncollectible loans may increase after accounts are closed. Valentin said that’s likely because “the cards have substantially less utility to cardholders,” cutting the incentive to keep up with payments.
“They’re hoping they can stay alive barely until the environment changes,” said David Robertson, president of the Nilson Report, the Carpinteria, California-based industry newsletter. This is “a big sign that the credit-card industry has problems that are going to be around for several years.”
Workforce Slashed
Advanta was the 11th-biggest U.S. credit-card issuer at the end of 2008 with about $5 billion in outstanding balances, and the only major lender focused on small business borrowers, Robertson said. In the first quarter the company slashed the workforce by about 300 employees, or 36 percent, from 841 as of Dec. 31, 2008. Calls inquiring about the future of current employees weren’t returned.
The company’s woes aren’t likely to spread to other asset- backed issuers, said JPMorgan’s Flanagan. Advanta’s “precarious liquidity and capital position” make the lender more vulnerable to deteriorating credit than its stronger counterparts, Flanagan said in a May 8 report.
Credit-card companies can take steps to protect investors and avoid having to wind down trusts, including removing overdue accounts from the pool and increasing the cash cushion that comes with the securities to shield bondholders from losses. Bank of America Corp., Citigroup Inc., General Electric Co. and JPMorgan have already taken steps to protect their securitized assets as delinquencies surge, according to JPMorgan data.
Needs Capital
Advanta relied on the asset-backed securities market for funding, and has been unable to raise cash through securitization since June 2008, according to Bloomberg data. It is shut out of the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, because of ratings cuts on its bonds.
Credit card-backed debt eligible for purchase with TALF loans must be rated AAA. Moody’s Investors Service has assigned “junk” ratings to Advanta’s senior unsecured and subordinated debt. The trust preferred securities rating of Advanta Capital Trust I was cut to C from Caa3 in April by Moody’s, citing a “high degree of uncertainty” that investors will get repaid because of Advanta’s “weak financial condition.”
Today, Standard & Poor’s cut its rating on Advanta to CC from CCC and assigned a negative outlook to the company.
Source:
Bloomberg.com
By Sarah Mulholland and Cordell Eddings
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