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Small business card lender to close all accounts

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NEW YORK -- Advanta Corp. (Nasdaq: ADVNB), a credit card lender to nearly 1 million small businesses, will close all its cardholders' accounts next month in a last-ditch effort to stem losses.

Analysts said the move adds to already growing concerns that the company might not be able to survive. And while other credit card issuers won't likely fall into Advanta's situation, analysts said, worries remain that they might decide to cut credit lines further on small businesses.

"Advanta's problems call into question the business model at the end of the day," said Keefe, Bruyette & Woods card industry analyst Sameer Gokhale. "Are these really small business cards, or just consumer cards with really high credit lines?"

As of late March, Advanta wrote off about a fifth of its credit card debt as unrecoverable.

In anticipation of losses escalating further, Advanta said last week that on June 10 it will shut down all accounts. June 10 is when Advanta will offer to pay off investors who hold securities back by its cards -- a type of payout known as an "early amortization" of a trust. This way, Advanta said, the company can "maximize its capital and its liquidity measures."

It is the first early amortization of a trust since First Consumers National Bank's in 2003, said JPMorgan (NYSE: JPM) structured finance analyst Christopher Flanagan.

Advanta is offering holders of its card-backed securities between 65 cents and 75 cents on the dollar. Flanagan said it is unlikely investors will accept the deal, which could put Advanta in an even more precarious position.

Advanta's business relied on this trust as a means of funding, he said. "The question now is, do they want to fund it, say, through deposits? Or are they just not going to stay in business?"

Gokhale also said he had worries about the company's ability to operate in the foreseeable future. Earlier this year, Stifel Nicolaus & Co. analyst Chris Brendler said it was unlikely Advanta would survive.

Advanta's stock has plummeted 96 percent over the past two years.

The Spring House, Pa.-based company started out as a lender to teachers in 1951, and by 2001 was concentrating solely on credit cards to small businesses. It became the largest card issuer focused on small business customers.

When the economy began sliding in late 2007, missed payments started climbing. Not only was Advanta's customer base mostly small businesses, which tend to have much higher credit lines than the average consumer, but a quarter of its receivables came from California and Florida. In those two states, popular among small businesses, real estate values fell sharply.

Advanta raised interest rates, but it was not enough to offset the hemorrhaging. The lender suffered three straight quarters of losses; its first-quarter loss this year was $75.8 million. As of March 31, the company's charge-off rate for business cards -- the rate at which it wrote the balances off as irretrievable -- had soared to 20.1 percent from 6.5 percent a year earlier.

JPMorgan's Flanagan said he believes Advanta's situation is anomalous, because it is such a niche lender.

And KBW's Gokhale pointed out that Advanta probably took on too many customers right before the housing market turned. As the broader card industry struggled to expand in 2006-07, he said, Advanta's portfolio swelled by nearly 40 percent in 2006, and another 22 percent in 2007.

"You have to believe that they had a better mousetrap, or significantly adverse selection in customers. Looking at their results, we can see which one," Gokhale said.

Small businesses, which have fewer funding options than large companies, have been hit especially hard by the credit crisis. Roughly half of all small businesses rely on credit cards for financing, said Raymond Keating, chief economist with the Small Business & Entrepreneurship Council.

When the economy recovers, he said, card companies are likely to boost their credit lines to small businesses again.

"There's a great advantage for the credit card companies to be looking at the small business market. It's a growth area," Keating said. "But starting up a business is a very risky endeavor. That has to factor into the equation."

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