Advanta Shuts Down Credit-Card Lending Amid Surging Charge-Offs

By Hugh Son

May 12 (Bloomberg) -- Advanta Corp., the issuer of credit cards for small businesses, will halt new lending for its 1 million customers next month as the recession causes a surge in loan defaults.

Lending ceases June 10. Advanta will use as much as $1.4 billion to pay investors of its securitized credit-card loans part of the debt’s face value, the Spring House, Pennsylvania- based company said yesterday in a statement. Advanta said it’s preserving capital after charge-offs, or uncollectible debt, reached 20 percent on some cards as of March 31.

“This is a Hail Mary pass: They’re hoping they can stay alive barely until the environment changes,” said David Robertson, president of the Nilson Report, the Carpinteria, California-based industry newsletter.

Advanta has reported three consecutive quarterly losses and has seen its shares plunge from about $30 in June 2007 to $1.13 at the close of New York trading yesterday. The U.S. jobless rate reached 8.5 percent in March, a 25-year high, squeezing sales for small business owners. The economic slowdown affected Advanta’s customers across the country, Chief Financial Officer Philip Browne has said.

“We’ll be shutting down accounts for future transaction activities, but many of the customers will maintain balances and pay us off over time,” Browne said yesterday in a telephone interview. “We’ll have to service and collect on that, and that will be the first order of business for the company.”

Curtailing Business

Shutting accounts won’t accelerate payments for existing balances, Advanta said. While the company is “free to do new business in the future,” it doesn’t expect to do so until the plan is under way, according to the statement.

More than 90 percent of Advanta’s small business customers will have “adequate” access to alternative credit after the company halts lending, Browne said.

Advanta was the 11th-biggest U.S. credit-card issuer at the end of 2008 with about $5 billion in outstanding balances, and the only major lender focused on small business borrowers, Robertson said.

The company’s announcement yesterday is “a big sign that the credit-card industry has problems that are going to be around for several years,” said the Nilson Report’s Robertson.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net;