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Rating Action:

MOODY'S DOWNGRADES RATINGS OF ADVANTA CORPORATION (SENIOR TO B2) AND ADVANTA NATIONAL BANK (DEPOSITS TO Ba2)

20 Feb 1998
MOODY'S DOWNGRADES RATINGS OF ADVANTA CORPORATION (SENIOR TO B2) AND ADVANTA NATIONAL BANK (DEPOSITS TO Ba2) New York, 02-20-98 -- Moody's Investors Service today lowered the ratings of Advanta Corporation (Senior to B2) and Advanta National Bank (Deposits to Ba2). At the same time, Moody's raised the ratings of certain debt securities of Advanta National Bank being assumed by Fleet Bank (Rhode Island), N.A (Senior to A1). The rating agency's actions reflect the anticipated completion of Advanta's sale of its consumer credit card business to Fleet Financial Group, Inc..
Moody's said that the downgrade reflects the negative credit impact the sale has on the diversification and credit quality of the company's earnings, as well as the lower franchise value of the remaining businesses. Advanta will continue to rely heavily upon securitization for its funding, Moody's said, and a significantly greater portion of its earnings will be dependent upon non-cash income from gain-on-sale accounting. The downgrade also reflects the substantial volume of debt at the parent company, a significant portion of which matures over the next few years. While the parent company will initially have a large cash reserve, the rating agency noted that the parent company's debt burden is significantly greater than this reserve and the company's cash earnings are likely to be negative.
Advanta's dominant business line following the sale is its subprime mortgage operation. Although Advanta is one of the larger sub-prime mortgage lenders and servicers in the U.S., Moody's said, the sub-prime mortgage lending industry is highly fragmented and extremely competitive, and Advanta does not have a dominant market share. In addition, Moody's noted, the sub-prime mortgage industry has come under considerable stress lately due to deteriorating credit quality and higher pre-payments, and Advanta's subprime mortgage portfolio has exhibited a pattern of rising pre-payments and delinquencies similar to the rest of the industry. The company's other principal business lines include small business equipment leasing, small business credit cards, and subprime auto lending. These businesses also face significant competition and contribute only a relatively small percentage of Advanta's total earnings, the rating agency said.
While Advanta will realize a premium on the sale of its consumer credit card business, the rating agency noted that both the premium and a significant amount of additional capital will be returned to shareholders through an $850 million cash tender offer. Although the company's effective leverage improves modestly immediately following the sale and share repurchase, based upon Advanta's earnings and growth projections Moody's believes this improvement is likely to be only temporary.
Moody's stated that the ratings also reflect Advanta's use of multiple originations channels, prepayment penalties, and a relatively unique risk-sharing arrangement with many of its correspondents in its subprime mortgage business. These factors help the company to diversify its exposure and limit pre-payment risk. In addition, Advanta's large subservicing portfolio ($9.2 billion at December 31, 1997) enables the company to realize scale economies and benefit from a fee-based cash earnings stream which many of its competitors lack, the rating agency said. Finally, Moody's noted that Advanta National Bank's ability to obtain funding through insured retail deposits reduces the company's reliance on wholesale funds.
As a part of the transaction with Fleet Financial Group, Advanta National Bank is transferring certain debt securities and deposits to Fleet Bank (Rhode Island), N.A. However, Moody's noted, only a portion of Advanta National Bank's bank notes will transfer to Fleet Bank (Rhode Island). Specifically, only those bank notes for which Advanta has obtained a signed consent form from the debt holder will be transferred. The ratings on those bank notes have been upgraded (Senior to A1). All other bank notes are being retained by Advanta National Bank, and the ratings on the bank notes being retained have been downgraded.
The following ratings were downgraded:
Advanta Corporation -- the rating for senior long-term debt to B2 from Ba3; the rating for subordinated long-term debt to B3 from B1; the rating for junior subordinated long-term debt to Caa1 from B2; and the preferred stock rating to "caa" from "b2".
Advanta Capital Trust I -- the preferred stock rating to "caa" from "b2".
Advanta National Bank -- the rating of the bank for long-term deposits to Ba2 from Baa3; the rating of the bank for short-term deposits and other short-term senior obligations to Not Prime from Prime-3; the rating of the bank for other long-term senior obligations to Ba3 from Ba1; the rating of the bank's senior bank notes to Ba3 from Baa3; the ratings of the bank's subordinated bank notes to B1 from Ba1; the counterparty rating to Ba3 from Ba1; and the bank's financial strength rating to E+ from D.
Advanta Corporation, headquartered in Spring House, Pennsylvania, had assets of $6.7 billion and managed assets of $21.1 billion at December 31, 1997. On a pro forma basis following the sale of its credit card operations, managed assets will be approximately $8.6 billion.

No Related Data.
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