Advanta Corp.'s board of directors has approved a plan designed to significantly limit the credit card company’s credit loss exposure as well as maximize its capital and its liquidity measures.

Because of the deteriorating economic environment, Advanta would expect the negative performance trends, if not stopped with this plan, to result in losses that would erode its capital.

The firm expects the following effects to result from this happening. The firm’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 allowed to fund new receivables after June 10, Advanta 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, according to the release. This is why the card 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, the firm explained that almost all of the receipts from cardholders are required to be paid to the securitization trust’s noteholders and to the firm’s seller’s interest  or its on-balance sheet share of the receivables. The securitization trust’s notes are obligations of the trust and not of any Advanta entity. Thus, the firm is only at risk with respect to the off-balance sheet obligations to the extent of its residual interests.

According to the company, Advanta Bank Corp. will utilize 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 firm will still service and collect the securitization trust’s credit card receivables and its own receivables. This, aside from taking appropriate actions to adjust expenses to be consistent with these activities, will be the firm’s top priority, it said. The firm 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 the 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 still be issued in the ordinary course. The benefits of the plan to Advanta are designed to benefit the senior retail note program holders as well as Advanta's shareholders.

The firm previously disclosed that it expected to use tools at its disposal to avoid early amortization of the securitization trust unless it concluded there was a better plan to maximize its capital and liquidity. The firm has found that the plan that has just been outlined is the better plan.

According to a Bank of America/Merrill Lynch report, the economic environment has placed considerable pressure on the credit performance of lenders' credit cards portfolios.

Merrill said that this is especially true for Advanta, who has seen a significant rise in delinquency and charge-off rates. BofA/Merrill analysts believe the trust will continue to be impacted by the weak economic environment. In addition, they think closing the accounts will add to the level charge-offs, as the credit card accounts lose utility to the holders.

Merrill added that the charge-off rate will also be affected by adverse selection and a declining pool balance. The quality of servicing may also suffer as the company winds-down its collection efforts, placing pressure on credit performance.

First Data Resources offers certain administrative functions that are associated with the servicing of Advanta's portfolio, which could minimize servicing risk. BofA/Merrill analysts believe the monthly payment rate will drop, with convenience users dropping out of the pool. Bank regulators usually look for banks to establish payment programs on closed accounts that do not go over 60 months. They think the portfolio yield for the trust will dip once the accounts are closed. The closed account will no longer generate interchange fees.

The master trust funds about $3.9 billion of receivables in the term ABS market, according to Merrill. They also noted that if an early amortization event happens on June 10, they think most of the classes with near-term maturities will extend beyond their expected maturity dates, although the 2005-A5 series should pay off, as expected, on May 20.

BofA/Merrill analysts believe some of the key elements in the evaluation process will include: the bank regulators' reaction (Advanta Bank Corp, the sponsor and servicer of the master trust, had about $2.4 of insured deposits at the end of 1Q09), collateral performance and servicing quality expectations, the view on legal matters related to the sponsor and servicer. To properly evaluate the tender offer, BofA/Merrill analysts believe updated collateral information should be offered to investors.

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