PhillyDeals: Buy company notes with eyes wide open

When they need cash, companies sell stock to the public. Or bonds. Or they borrow from banks, or the government.

And some companies borrow directly from small investors, in $1,000 or $5,000 increments. These notes pay higher than banks or savings bonds, and the returns are steadier than the stock market.

Unlike bank deposits, company notes aren't guaranteed by the government or anyone else. When times are tough, a guarantee is a good thing to have if you're betting your life savings, as too many note-buyers have done over the years.

Americans own about $15 billion in GMAC L.L.C. SmartNotes, which typically pay 7 percent or more. These notes have been trading at deep discounts over the last year as investors worry whether GMAC will go broke like its former owner, General Motors Corp.

GMAC spokeswoman Beth Coggins says the company has paid its past obligations and expects to keep paying.

Closer to home, investors own about $200 million of notes sold by Advanta Corp., a Spring House credit card company. Advanta advertises, in The Inquirer and elsewhere, rates of 8.5 percent for one year, up to 11 percent for 10 years.

Advanta warns prospective investors, "If Advanta Corp.'s assets are insufficient to pay the principal of, and interest on, the securities, you could lose some or all of your investment."

Advanta has had to cut its dividend and write off hundreds of millions of dollars in bad loans so far this year. The stock trades below $1 a share.

"Read the disclosure," Advanta chief financial officer Philip Browne urged when I asked him what he'd advise retirees and senior citizens attracted by the high rates. "Don't over-concentrate your assets" in this one investment. "Use financial advisers."

Despite hard times for auto and card lenders, GMAC and Advanta have been paying investors on schedule.

What if times get worse? Advanta has more than $400 million in capital, and a "cushion" of more than $100 million in junior debt held by institutional investors that would go bad before the notes, Browne said.

Investors in smaller companies' notes haven't always had that margin.

Owners of $600 million in notes issued by the former American Business Financial Services Inc. are still trying to collect partial payment on their principal after the Philadelphia loan company's bankruptcy in 2005.

Founder Anthony Santilli died before his customers could have their day in court. Investor trustees filed a string of lawsuits to try to collect part of the loss from ABFS business partners, including at least one big Wall Street investment firm.

ABFS investors have told The Inquirer they've been offered as little as 20 cents on the dollar by speculators.

Owners of $60 million in notes issued by the former Walnut Equipment Leasing Co., of Philadelphia, received, on average, less than 15 cents on the dollar after it shut in 1999.

How do you see that coming? "Look at the financials," Browne said. Notes only make sense if the issuer has "a rational capital structure."

If you can't figure that out, or employ someone who can, you aren't going to have an informed opinion on whether you can handle the risk of making a high-rate but un-guaranteed investment.

Bids for Lincoln National Corp.'s Philadelphia-based Delaware Group, its $120 billion in assets and 1,000 Center City employes, range "between $350 million and $450 million." This according to a report on a Financial Times' Web site. Unnamed "people familiar with the process" are the source for the estimate on the bids.

Lincoln, a large, cash-hungry life insurer that's trying to get federal bailout money, will conduct management presentations next week, the sources say. "Lincoln will then pick a final bidder," according to the report.

"About six parties are vying for Delaware. . . . Bidders are said to include private-equity firms Advent International, and Hellman & Friedman, and fund firm American Century Investments," FT's sources say. Sometimes sources like to talk up prospects, because it makes the really interested bidders insecure and prods them to bid more. Goldman Sachs Group Inc. is advising on the sale.