Advanta Bank terminated its cash tender offer for up to $1.4 billion of Advanta Business Card Master Trusts Class A senior notes, indicating that the offer failed to satisfy a regulatory condition. The variables that were expected to impact the credit performance of the trust have not changed with the withdrawal of the tender offer.
Advanta thinks that the trusts three-month excess spread will fall to less than zero this month and thus the trust will probably enter early amortization.
Bank of America/Merrill Lynch analysts do not believe that the terms of the regulatory agreement will prevent an early amortization, assuming that the three-month excess spread falls to less than zero. In the past, bank regulators have prevented early amortization resulting from receivership but not because of negative excess spread. The examples of Washington Mutual and Next Card come to mind.
The master trust funds about $3.9 billion of receivables in the term ABS market. Assuming an early amortization event happens this month, most of the classes with near-term maturities will extend beyond their expected maturity dates, analysts said.
According to the analysts, the economic environment has exerted considerable pressure on the trusts credit performance, and will continue to do so. Based on the now terminated tender price of $65-$73 , which excludes early participation payment as well as recent market levels, the company was not expected to achieve the full tender amount by many market players.
Analysts expect that closing the accounts will add to the level charge-offs, as will adverse selection and a declining pool balance. When compared to the limited history of similar closings of portfolios of credit card accounts, the charge-off rate can be expected to fall from Aprils approximately 20% to a range of 35% to 45%.
The trusts portfolio yield is also projected to decline, as the closed account will no longer generate interchange that contributed 400 basis points to 450 basis points to the portfolio yield, which is expected to be immediate. This, aside from the lack of other fees, are expected to exert downward pressure on the portfolio yield, analysts said. They added that the bank will have limited, if any, ability to re-price the accounts.
Additionally, the monthly payment rate will drop as convenience users drop-out of the pool, demonstrated in May 2008 when 23% of cardholders repaid their outstanding balance.
The quality of servicing may also suffer as the company winds down its collection efforts or, if required, transfers servicing to a third party. Advanta has contracted First Data Resources to perform certain administrative functions associated with the servicing of the companys credit card accounts. These services include providing data processing services; performing billing; posting and settlement processes; generating monthly billing statements; providing credit and fraud management tools, Merrill Lynch said.
