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Rating Action:

Moody's Upgrades Advanta

20 Apr 2007
Moody's Upgrades Advanta

New York, April 20, 2007 -- Moody's Investors Service today upgraded Advanta Corporation's long-term ratings, including its senior unsecured rating to Ba3 from B1 (see complete list below), reflecting the company's continued strong financial performance and core focus on business credit cards. The rating outlook is stable.

Moody's said Advanta's improved profitability since the last rating action in December 2005 was a key driver for the rating upgrade. During this time, the company's net income in its core business card segment increased approximately 53% in 2006 from 2005, while return on average managed assets (adjusted for a large one-time gain in 2005) increased to 1.51% from ~ 1.1%. This was due to an increase in overall receivables, continued strong credit quality, and continued discipline in operating expenses.

Moody's recognizes the strong credit environment over this time period, in particular 2006, which benefited from an acceleration of chargeoffs in 2005 in anticipation of new bankruptcy legislation which became effective on 10/17/05. However, Advanta has improved its credit scoring technology and has focused on primarily underwriting to a higher credit quality demographic. This shift up the credit scale has been successful to date; however, this will continue to be monitored due to the greater competition found in the "prime" sector. This has been evidenced by the company's net interest margin decline in 2006, due primarily to the aforementioned higher credit quality clientele, the competitive environment, promotional offers on new accounts, and higher funding costs due to higher market interest rates. A substantial decline in margin or a shift to greater focus on sub-prime account growth could pressure the current rating.

Advanta has historically been involved in various litigation and ventures into other businesses distinct from business credit cards (e.g. mortgage and consumer lending, venture capital). During the past two years, the company has resolved all material litigation and has focused on its primary business in which it has developed a core competency. The company's continued operation free of significant litigation while maintaining its primary investment in business cards is key for the rating.

Advanta's ratings remain constrained by the firm's monoline nature and relatively modest competitive position versus others that compete in its space. As mentioned previously, while the firm has developed a solid niche in business credit cards, it has limited scale advantages compared to the largest U.S. credit card issuers. The business card segment will likely remain highly competitive, due to its favorable growth characteristics and the greater interchange fees available to the providers of business credit cards. . In Moody's opinion, these relatively higher interchange fees are critical to the company's business model. Therefore, a sizeable decline in interchange fees would materially affect the firm's profitability and franchise, and would negatively affect its credit standing.

Moody's notes also that Advanta's leverage metrics have elevated over the past year as the result of share repurchase activity, and can be expected to elevate further -- potentially to historic highs - in the immediate future as the result of the recently announced additional share repurchase program. Given the company's monoline nature and competitive position, Moody's considers maintenance of a solid capital position to be an important rating factor. Accordingly Moody's will continue to monitor closely the development of Advanta's capital and leverage.

Finally, Advanta relies on securitization and to a lesser extent bank deposits as its primary sources of funding. The company's limited funding sources create additional risk during a stress scenario. While the company mitigates this to some extent through its de-linked securitization structure and asset-liability management policy including contingency funding plan policies and procedures, increased sources and access to funding would further support the rating.

What Could Change the Rating - UP

While the ratings are well-positioned, continued improvements in core profitability and efficiency coupled with lower leverage, especially if combined with evidence of sustained success in competing against larger competitors without impairing asset quality, could put upward pressure on the ratings. Demonstrated access to additional sources of funding for credit card receivables beyond securitization and bank deposits could also be positive for the rating.

What Could Change the Rating - DOWN

Ratings could go down if asset quality, profitability, or capital and leverage deteriorate materially, or if liquidity or funding flexibility is significantly reduced.

Ratings upgraded included the following:

Advanta Corporation --

-Senior unsecured debt to Ba3 from B1

-Senior unsecured shelf to (P)Ba3 from (P)B1

-Subordinated debt to B2 from B3

-Subordinated shelf to (P)B2 from (P)B3

-Preferred Stock shelf to (P)B3 from (P)Caa1

Advanta Corporation, headquartered in Spring House, PA, reported approximately $6.3 billion in managed assets as of December 31, 2006.

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Curt Beaudouin
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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