Advanta Corp. suspends credit cards

In a last-ditch bid to survive the nation's economic downturn, Advanta Corp. is closing its small-business customers' credit cards to new charges after June 10, the Montgomery County company said yesterday.

The unprecedented move, which will affect nearly one million accounts with the Spring House firm, was designed to preserve the capital Advanta needs to absorb losses on loans to small-business owners, who often borrow heavily and typically bear the brunt of economic downturns, the company said.

One credit-card industry expert said the action would leave Dennis J. Alter, Advanta's chairman and chief executive officer and a prominent philanthropist, with slim chances of breathing life back into the company his father founded in 1951 to lend money to teachers. Now the firm has a small-business focus.

"They are obviously in dire straits," said David Robertson, publisher of the Nilson Report, an industry newsletter. Robertson called Advanta's plan, including the proposal to pay some of its own lenders pennies on the dollar, a "Hail Mary."

Phil Browne, Advanta's chief financial officer, said the goal was to "maximize capital and liquidity so we have the opportunity to pursue businesses, credit cards and others, in the future."

The plan lets cardholders continue making the same minimum payments as before, but prohibits additional charges.

Browne said he believed the company would be able to make good on the $200 million in notes held by often elderly individual investors who are attracted to their high interest rates relative to certificates of deposit.

"This plan is designed to help ensure the fact that they are made whole," Browne said. The notes are not insured by the Federal Deposit Insurance Corp.

Institutional investors, on the other hand, are being offered far less then the face value of certain notes, the company said.

Advanta, the nation's 11th-largest credit-card company, is unusual in that it does not offer personal credit cards.

That is a factor in Advanta's troubles, Robertson said, because Advanta's small-business customers are apparently working harder to keep their payments up to date on their personal accounts at other companies and leaving Advanta "holding the bag" on their business accounts. If one company supplies both credit cards, the customer has less wiggle room.

Robertson said Advanta's percentage of loans written off as uncollectible, at 20 percent on March 31, exceeded subprime consumer accounts at other lenders. "This is a life-threatening charge-off level," he said.

Jim Shanahan, chief executive of Maverick Business Solutions in Wilmington and a longtime observer of the credit-card industry, said loss rates could go even higher because some Advanta customers probably kept making minimum payments just so they could continue using the card. When they can no longer use the card, the Advanta bill is likely to go to the "back of the pile" when it's time to pay bills.

Shanahan said that in his 30 years in the industry, he had never heard of a company shutting down credit cards across the board. "They must be in some serious trouble on the risk side of things. It must be really getting out of control," he said.