Advanta Bank Corp. may slip into Federal Deposit Insurance Corp. (FDIC )receivership, according to its parent company that filed for Chapter 11 bankruptcy protection on Sunday in Delaware.

Advanta Corp., the Spring House, Pa.-based, parent which filed for bankruptcy, warned that it would not be able meet obligations to noteholders of $138 million and its bank holding company may be taken over by the FDIC.

Advanta Bank Corp. "has fallen below regulatory capital requirements and over time Advanta Bank Corp may be turned over to an FDIC receivership," Advanta Corp said in a press released issued on Nov. 8.

Advanta Corp., a credit-card company, has $100 million in cash and equivalents on hand. It said in the press release that the bankruptcy “is intended to address that shortfall in an orderly way that benefits stakeholders most fairly.”

The company has a total of $363 million in assets and $331 million in debt, according to court documents.

"The economic debacle over the last two years devastated Advanta's small business customers and Advanta itself," Dennis Alter, Advanta Corp.'s chairman and chief executive officer said in a press release.

In May, Advanta Bank Corp., which is not included in the Chapter 11 filing, froze customer credit-card accounts, and is attempting to collect $2.7 billion from 360,000 customers.

Advanta filed with the U.S. Bankruptcy Court for the District of Delaware. The company's bankruptcy counsel is Weil, Gotshal & Manges of New York, along with local counsel Richards,

Layton & Finger of Wilmington, Del. Advanta’s financial advisor for the bankruptcy is Julie Hertzberg of Alvarez & Marsal.

Judge Kevin Carey is overseeing the case, filed as No. 09-13931.

In a report on the bankruptcy filing released today, Bank of America Merrill Lynch analysts said
that the most recent developments — on top of the difficult economic environment, the closing of all accounts, higher roll rates and previous workforce reductions at the bank — will continue to place pressure on Advanta Business Card Master Trust's credit performance.

BofA Merrill analysts estimated that the trust's charge-off rate for October will range between 20% and 25% (versus the rate was 22.23% in September).

The October charge-off rate, according to analysts, might be negatively affected by a seasonal month-over-month rise in bankruptcy filings. 

Analysts expect finance charges to fall to the low-to-mid-teen level (18.84% in September) and the monthly payment rate to stay close to current levels (4.18% in September).

The Class D notes issued by the trust were completely charged-off in the July collection period. Meanwhile, the Class C notes have experienced cumulative losses of $39 million in total as of the October payment date.

According to BofA Merrill analysts, the receivership of Advanta Bank and not the bankruptcy filing of Advanta Corp, would have a more direct effect on the trust. The former is a pay-out event, which, according to them is a moot point, since a pay-out event occurred in June 2009 as well as a servicer default. If a servicer default happens, noteholders representing more than 50% of the outstanding notes might direct the trustee to terminate the rights and obligations of the servicer and appoint a successor servicer.

Based on the trust documents, BofA Merrill analysts said that the Federal Deposit Insurance Corp. (FDIC) acting as receiver can (a) prevent the appointment of a new servicer, (b) authorize the servicer to stop servicing the receivables, or (c) increase the amount or the priority of the servicing fee because of the servicer.

At a minimum, analysts think that  the trustee will need to get the FDIC's approval to appoint a successor servicer and, if a successor is appointed, the servicing fee will probably need to be higher.

The company indicated that Advanta Bank is now collecting $2.7 billion of managed receivables from 360,000 customers, although the cards are not open to new charges. Additionally, the firm believes, BofA Merrill analysts said that the Chapter 11 proceeding will not have any effect on outstanding credit card balances. Customer payment obligations will also continue as scheduled.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.