Advanta Corp.'s decision to let its securitization funding vehicle unwind and stop lending to account holders could unsettle a market for credit card-backed securities that has just started to rebound.

The plan, disclosed Monday after the market closed, may intensify credit deterioration in the Spring House, Pa., company's portfolio and expose investors in its credit card-backed bonds to greater risk of principal losses, analysts said. When an issuer stops supporting new charges, credit deterioration tends to accelerate as account holders who qualify move to competitors that offer functioning cards, leaving the riskiest customers behind.

"There will be a question as to the ultimate payout to the bondholders," said Daniel Nigro, a portfolio manager for Dynamic Credit Partners, a New York investment management firm that specializes in structured finance.

The episode could temporarily drive spreads on credit card-backed bonds wider after significant compression since the end of last year, he said.

"When you get headlines that make people rethink some of the basic assumptions about structure and add to uncertainty, it's only natural to expect that there might be an interim pullback," Nigro said. "All in all. I think that it's going to send something of the fear of God back into some people."

To be sure, Advanta, which specializes in small-business cards, is in a far weaker position than the large issuers that dominate the card industry. Those issuers have taken aggressive steps to buttress their securitization programs in recent months. And analysts said even Advanta still has an incentive to try to maximize the performance of the portfolio during early amortization because of its residual interest in the trust.

Philip Browne, Advanta's chief financial officer, said in an interview Tuesday that the announcement did not reflect an ultimate verdict on the business.

"It's a decision for today, and there's ways to set up a business model for small-business credit cards in the future," he said. "It may have some differences than what we've done so far."

But analysts interpreted the decision as a sign Advanta is throwing in the towel.

"The company seems to have decided there's no point in putting additional cash and support into their trust given the high loss rates. It might just be an exercise in futility," said Sameer Gokhale, an analyst at KBW's Keefe, Bruyette & Woods.

Meghan Crowe, a director at Fitch Ratings, said Advanta "is effectively in runoff mode."
Observers said the company's move also underscores a breakdown in the small-business credit card industry.

Credit card securitization deals include triggers that compel early amortization, typically including when the excess spread — similar to net income — of a trust falls below zero for a certain length of time.

Last month, Advanta said its excess spread was 1.34% in March; that it had bought about $7.5 million of charged off receivables from the trust in April to strengthen its performance; and that additional support would probably be needed this month and in future months to prevent early amortization.

In the first quarter the company's managed chargeoff rate increased 387 basis points from the previous quarter and 943 basis points from the year prior, to 15.9%.

Advanta's managed receivables fell 6.3% from the previous quarter and 25% from the year prior, to $4.7 billion in the first quarter. Securitized receivables totaled $4.2 billion in the same period.
Browne said the early amortization would give Advanta "the maximum amount of options to re-enter business in the future, including issuing new credit cards."

Analysts called that a remote possibility.

"It's going to be tough to get going again," Crowe said. "You're cancelling the utility of all these cards." From the perspective of Advanta's cardholders, "you're burned once, I don't know if you want to get burned again."

Browne acknowledged that "there will be some customers who will feel alienated by the Advanta brand." But "there are about 30 million small businesses out there. We have about a million of them, so that leaves a pretty good breadth of additional opportunities." Advanta also could offer cards under a different brand name, he said.

Analysts also said the decision to allow the trust to go into early amortization would likely alienate potential investors. Browne said, "We're not counting on having access to the asset-backed debt market anytime soon."

Advanta also said Monday that its $3.1 billion-asset bank subsidiary would spend up to $1.4 billion to buy its senior credit card-backed notes from investors for 65 cents to 73 cents on the dollar. Analysts said that offer could imply the company believes the securities will suffer principal losses.

Browne said Advanta is "tendering at a price that's in the range of recent trades for those securities, and the liquidity might be perceived as valuable to" investors. "We perceived that that would be an appropriate investment for us at that level also."

Gokhale said "it's possible" that regulators would object to the bank making such purchases, given the credit performance in the underlying pool of receivables, though Advanta's offer is for the "senior-most pieces" and involves a significant discount. Browne said, "We keep very close communications and frequent communications with our regulators."

Christopher Wolfe, a managing director with Fitch, said, "Regulatory intervention is clearly a risk that you have to consider when the company gets into this kind of trouble."

The Federal Deposit Insurance Corp. said it does not comment on operating banks as a matter of policy.

Nigro said that despite Advanta's woes, "the trend is good for credit card spreads and issuance" of asset-backed securities over the longer term.

Investors recognize that Advanta is "a weak hand among card issuers and may not be reflective of the broader market itself," he said, citing stronger funding positions and access to government support at big competitors, for example, and Advanta's unique concentration in small-business cards.

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