A surge in chargeoffs and delinquencies is threatening Advanta Corp.'s survival.

Analysts said that if the Spring House, Pa., card issuer's portfolio continues to worsen at the rate posted last month, it would trigger an unwinding of the company's securitization master trust, its primary source of funding.

Without the trust, Advanta would have to look for substitute financing that analysts said may be hard to come by.

It is rare for credit losses in a securitization to rise so much that the whole vehicle is unwound. Such an event would unnerve the already dysfunctional market for ABS, which the government hopes to restore to improve the flow of credit to consumers and small businesses.

One analyst went so far as to predict that Advanta, whose specialty is small-business cards, may be forced into bankruptcy, and that its $2.7 billion-asset Utah bank might be seized by regulators. The elimination of a competitor might mean more room to maneuver for other issuers, and the defections of high-quality accounts could help some lenders.

In a securities filing Tuesday, Advanta reported that the chargeoff rate last month in its securitization trust jumped 72 basis points from November, to 12.91%.

Christopher Brendler, an analyst at Stifel Nicolaus & Co., wrote in a note to clients that early amortization - a rare event in which cash flows from the trust would be directed to pay off bondholders and the structure would unwind - "appears unavoidable without a significant improvement in credit quality, and that appears highly unlikely in this" economy.

Since the company has more than $4 billion of outstanding bonds, "even Advanta's substantial cash hoard will likely prove insufficient, and we believe the company will be forced into bankruptcy if the trust does indeed amortize early," Brendler said.

He cut his rating on Advanta shares Wednesday to "sell," from "buy."

In an interview, Brendler predicted a 25% loss rate for Advanta by the summer. He cited trends in the last three months of last year.

"Unless things improve, 25% losses are on the way for this company," he said. "I just can't imagine the trust is going to be able to stay alive."

Even without early amortization, Advanta is under funding pressure. The company had about $1.8 billion of cash and liquid assets at Sept. 30, and its banking subsidiary had $2 billion of deposits, but about $1.7 billion of its card-backed bonds were due to mature between Oct. 30 of last year and the end of this year.

Brendler said he initially believed Advanta would be able to fund maturing bonds with deposits, but his "concern is that the regulators would step in and not allow that to continue."

There is "a chance" that the Federal Deposit Insurance Corp. (FDIC) will shut down Advanta's banking operations this year, he said. (Advanta has an industrial loan bank in Utah that issues most of its business cards and a bank chartered in Delaware that it has said is not material to its operations; both are overseen by the FDIC.)

The company did not respond to calls for comment Tuesday.

Christopher Wolfe, a managing director with Fitch Ratings, said that if the Advanta pool's credit performance were to continue to deteriorate at the rate posted for December, the trust would be forced into early amortization.

Whether Advanta would be able to survive such an event is uncertain, Mr. Wolfe said; the headlines that would result might make attracting deposits a challenge.

Scott Valentin, an analyst at Friedman, Billings, Ramsey Group, took a less dire view of Advanta's overall position. In a note to clients Tuesday, he wrote that cash trapping is likely this year. (Trapping is a less extreme mechanism for protecting investors than early amortization; the master trust begins accumulating funds that otherwise would have flowed to the issuer.)

Such an event might not be "material" in view of Advanta's sizeable liquid assets, but he recommended a dividend cut anyway.

Sameer Gokhale, an analyst at KBW's Keefe, Bruyette & Woods , said that early amortization would not "automatically" mean bankruptcy, since Advanta could try to whittle the portfolio to a size that could be supported with its balance sheet alone. "But clearly that would be a very, very difficult operating environment. ... Cash flows would be very strained."

Advanta would be unlikely to find a buyer in the near term, Gokhale said. "You have to see the chargeoff rate stabilize so that a potential buyer can actually get some comfort." Also, "a lot of the potential acquirers themselves - the large banks and other card issuers - are facing their own challenges."

Dennis Alter, Advanta's chief executive, said in October that it was separating its customers into three tiers according to profitability. "The last group will be segregated, sequestered, and surrounded, and we expect our exposure to them will be reduced greatly in a variety of ways."

He did not elaborate, but in the months since then Advanta has been repricing accounts, in some cases raising interest rates by almost 30 percentage points.

Some analysts said this tactic has created adverse selection.

"Typically the best customers try to leave and go elsewhere if they can get better rates, and then you're left with borrowers who are maybe a higher credit risk," Gokhale said.

Boaz Salik, the managing principal at the consulting firm FischerJordan, would not predict Advanta's fate, but he said its absence could create opportunities for its rivals.

"The other large small-business issuers will probably have an opportunity to purchase a large portfolio at an attractive price," Salik said. "It may not be the whole portfolio, but there are certainly likely to be segments of that portfolio that are attractive to Advanta's competitors."

Having "one less competitor in the space" could "result in higher pricing, which means better margins for issuers and higher pricing for customers," he said. "It should make it easier for issuers to not have to compete as much for better-risk customers and to control the amount of risk that they take on."

Gokhale agreed with that assessment, to a point. In the long run other issuers might benefit from a competitor's absence, but credit losses on small-business cards currently are heavy across the industry, and lenders generally "are not seeking to expand their business rapidly," he said. "Most of the card issuers are focused on managing their existing portfolios."

At Sept. 30, Advanta had $5.6 billion of managed receivables, $4.7 billion of which were securitized.

The Federal Reserve Board and the Treasury Department hope to revive the moribund ABS market with the Term Asset-Backed Securities Loan Facility, a program they plan to launch next month.

Maria Aspan contributed to this story

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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