Credit Commentary

Advanta to Close One Million Credit Card Accounts

By Zarana on Friday, May 29 2009

Advanta Corp. (NASDAQ: ADVNB; ADVNA) announced on May 11, that it has approved a plan designed to dramatically limit the Company’s credit loss exposure and maximize its capital and its liquidity measures. 

Reacting to mounting losses from credit defaults, company officials decided to close down all of the firm's outstanding credit lines. In a press release, the company indicated that it took the move in advance of a June deadline that would cut off its own capital reserve. The company will continue to accept payments on existing balances, but won't make any new loans. 

Advanta announcement marks the second major blow to small business credit card holders this month. Last week, JPMorgan Chase closed thousands of credit lines that had originally been opened as Washington Mutual business credit card accounts. Going forward, it is expected that an increasing share of small business owners will rely on personal credit cards to manage company finances. 

Advanta’s move is one of the most extreme retreats in the credit-card industry, which is result of record delinquency and default rates. Advanta is a tiny player overall with $5 billion in outstanding card loans compared with $176 billion at J.P. Morgan Chase & Co. as of March 31.  Default rates on Advanta cards were 16% of outstanding loans in the first quarter.   

The company funds its credit-card receivables by placing them into a trust and selling shares in it to investors who are paid interest on their investment. But with rising delinquencies, less money is coming into the trust, and there are fewer dollars available to pay the investor bondholders. Moreover, bad news knocking the doors of bond holders;  "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. 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"

Advanta suffered a $76 million first-quarter loss, partly because of charges and reserve building related to investments receivable losses. The company laid off 300 of its 900 employees earlier this year in an effort to cut operating expenses by as much as 25 percent off last year’s numbers.