Last week’s announcement was terse and to-the-point. Advanta’s Board of Directors, expecting a continuation of the recession as well as the further erosion of the company’s capital, approved a plan to “dramatically limit the Company’s credit loss exposure and maximize its capital and its liquidity measures.” These measures include the following:
- The Company’s securitization trust will go into early amortization based on May’s performance. Early amortization will officially be determined on June 10.
- Since the securitizations will not be permitted to fund new receivables after June 10, the Company will shut down all credit card accounts to future use at that time. Neither Advanta Bank Corp. nor any other Advanta-related entity will fund activity on its balance sheet from the accounts. Therefore, the Company will not take any off-balance sheet receivables onto its balance sheet. Shutting down the accounts will not accelerate payments required from cardholders on existing balances.
- In early amortization almost all of the receipts from cardholders are required to be paid to the securitization trust’s noteholders and to the Company’s seller’s interest (its on-balance sheet share of the receivables). The securitization trust’s notes are obligations of the trust and not of any Advanta entity. The Company is only at risk with respect to the off-balance sheet obligations to the extent of its residual interests.
- Advanta Bank Corp. will use up to $1.4 billion to make a cash tender offer for Advanta Business Card Master Trust Class A senior notes at a price between 65% and 75% of their face value in a modified Dutch Auction.
- Advanta Corp. will make a cash tender offer for any or all of the $100 million of 8.99% Capital Securities issued by Advanta Capital Trust I at 20% of their face value.
- The Company will continue to service and collect the securitization trust’s credit card receivables and its own receivables. This, along with taking appropriate actions to adjust expenses to be consistent with these activities, will be the Company’s first priority. The Company will be free to do new business in the future to the extent it chooses, but it does not expect to do so in a significant way until implementation of the plan is well under way.
- Advanta Corp.’s senior retail investment notes are unlimited obligations of Advanta Corp. and will remain outstanding and continue to be issued in the ordinary course. The benefits of the plan to the Company are designed to benefit the senior retail note program holders as well as the Company’s shareholders.
Most of that has to do with the company’s internal financial arrangements; they are going to turn their current receivables into securities in order to raise cash. However, notice the first sentence in that second point:
Since the securitizations will not be permitted to fund new receivables after June 10, the Company will shut down all credit card accounts to future use at that time.
That means, in order to protect themselves from further loss and liability, if you have one of their cards, even if you have a perfect record of payments, your credit is going to be cut. That will cut into your credit rating, it will make it that much harder for you to do business and it will put you in a position of having to replace Advanta during one of the most difficult times in history to obtain credit. Happily, Advanta is not accelerating payments on these accounts, and will continue to service them until they are paid off, though one cannot count on that. If the economic conditions demand it, or the securities sales don’t go off as advertised, there can be little doubt that Advanta would call in its outstanding debts in order to protect itself.
From a big picture point of view, Advanta is just the latest in the parade of credit card suppliers—both for business and consumer cards—to have taken steps to minimize the risk they face in the admittedly risky business they are in. So, in that sense, this is really nothing new. However, there is a bright side in that SBA loan programs are picking up as banks begin to make loans. SBA chief Karen Mills said: “More than 10,000 Recovery Act loans have been approved. These represent about $3 billion in credit supporting small businesses.” What does that mean for you? It means that while credit card companies may be pulling back from the market, banks are beginning to make loans again, guaranteed by the Small Business Association.
The Bottom Line
Let’s not sugar coat it—there are going to be small businesses that will be deeply hurt by this move from Advanta. There will likely be some litigation behind it. After all, they are pulling the rug out from under their customers, and that is never a good thing to do no matter what the circumstances are. On the other hand, there is movement from the banks. They are making SBA loans again and that is welcome news. Certainly, it will not be like it has been during good economic times, but if you are a victim of Advanta’s self-defense, there is hope.