Advanta ADVNA
August 30, 2010 - 4:00pm EST by
samba834
2010 2011
Price: 13.50 EPS NM NM
Shares Out. (in M): 10 P/E NM NM
Market Cap (in M): 0 P/FCF NM NM
Net Debt (in M): 230 EBIT 0 0
TEV: 230 TEV/EBIT NM NM

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Description

OVERVIEW

An investment in the Advanta 8.99% Trust Preferreds due 2026 offers investors the opportunity to earn multiples on their investment with minimal downside risk.  A recent settlement with the FDIC greatly reduces the downside for the Trups, shortens the duration of the reorganization, and reduces professional fees.

For those familiar with the defunct bank holding company reorganization (Washington Mutual, Fremont, etc) the facts in Advanta will sound familiar.  The key assets include cash, receivables, securities, tax refunds, and litigation recoveries.  The key claimants are bondholders, trade creditors and the FDIC.  At the outset, the key risk for unsecured creditors was an adverse outcome in litigation with the FDIC, but this risk has now been eliminated.

BACKGROUND

Advanta., a subprime credit card issuer catering to small businesses, entered Chapter 11 following a severe increase in delinquencies and charge offs as the economic downturn impacted its customer base.  Incorporated in 1974 as Teachers Service Organization, Advanta's most recent business model took hold in the mid 1990s.  Advanta issued credit cards to small business owners unable to receive credit from more traditional lenders like American Express.  Advanta's advanced credit and sourced funds from its wholly-owned sub, Advanta Bank Corp., a Utah-based industrial bank. As an industrial bank, ABC did not take deposits and funded its balance sheet with high-cost brokered CDs.  As the economic downturn accelerated, charge offs and delinquencies increased.  As these credit problems ramped, Advanta's cash burn increased and its capitalization at ABC rapidly deteriorated.  Soon, ABC was subject to a cease and desist order from the FDIC and was restricted from issuing new credit. With limited options for additional liquidity, Advanta Corp filed for Chapter 11 on November 8, 2009.

 

FDIC LITIGATION & SETTLEMENT

Despite Advanta's November 2009 bankruptcy filing, Advanta Bank Corp was not seized until March 19, 2010.  By this time, Advanta Corp had already completed numerous tasks within its reorganization, including the filing of its 2009 and amended 2008 tax returns.  Of note, Advanta structured its tax filings in a way that reduced the aggregate refund, but also limited the size of FDIC's claim for the portion of the refund owed to ABC.   (Advanta Corp and all of its subsidiaries, including ABC, operated under a tax sharing agreement which specified that each subsidiary pay/receive taxes as if the sub had filed a tax return on its own.)  The FDIC strongly opposed Advanta's tax strategy, and sought permission to file its own tax returns.  The FDIC argued that Advanta should have filed to receive a larger aggregate refund (based on ABC's losses).  However, if this strategy was accepted, Advanta countered, the FDIC would receive a large unsecured claim, to the detriment of all of Advanta's other creditors.  This set the stage for a protracted fight between the FDIC and Advanta.

 

However, as the preliminary hearings began last week, Advanta and the FDIC reached a settlement that resolved the tax dispute and included a mutual release of any additional litigation between the two.  The settlement agreement specifies:

  • The FDIC receives permission to file its own tax returns, which request the larger refund based on ABC's losses in 2009
  • If the IRS accepts the amended returns, 90% of the incremental refund will go directly to the FDIC and 10% will go to Advanta Corp.
  • If the IRS rejects the amended returns, the FDIC will receive an unsecured claim for $50 million.
  • Both Advanta and the FDIC agree to mutually release each other from any further claims going forward.

 

RECOVERY ANALYSIS

Resolution of the litigation with the FDIC provides increased clarity into the potential recovery for Advanta's unsecured creditors.  Details of our assumptions for assets and claims are described below in more detail.

ASSETS

Cash:  $108 million of cash and equivalents.

Tax refund:  $3 - 6 million incremental recovery expected.  (Final outcome determined by whether the IRS accepts the FDIC return).

Credit card receivables:  $31 million of credit card receivables outstanding.  Almost all of the outstanding receivables are current pay.  Given that these receivables are currently amortizing a year after Advanta ceased advancing funds, we view the receivables to be very high quality. Our estimated recovery from receivables assumes:

  • 5% charge off rate for current pay receivables ($27.4 million balance)
  • 25% charge off for all balances 30 - 60 days delinquent ($1.6 million balance)
  • 50% charge off for all balances 61 - 90 days delinquent ($1.1 million balance)
  • 100% charge off for all balances 90+ days delinquent ($0.9 million balance)

Visa B shares:  Advanta owns 497,000 Visa B shares, a specific share class issued to participants in the interchange network. B shares currently convert to 0.55 Visa A shares, but are restricted from conversion until the latter of March 2011 or the settlement of specific litigation.  In the interim, Visa B shares can transfer to other Visa B holders.  There are two primary inputs to determine the value of this asset:  potential increase in value of Visa A shares over time and the time value of money determined by the duration of the lock up.  Visa shares are trading about 5% above their 52-week low and about 40% below their 52-week high.  To keep it simple, we assume a 10 - 30% discount of the current value of converted B shares based on the current price of Visa.  This valuation assumes no increase in Visa's share price and a roughly 1 - 3 year duration of the lock up (discounted at a 10% rate).  Obviously, an increase in the value of Visa A shares, a shortened duration of the lock up, and a lower discount rate are all accretive to the recovery of the Trups.

Fleet Services:  Advanta owns 1.3% of Fleet Credit Card Services, L.P., (FCCS) which is a carryover from its exit of the consumer credit business.  Advanta sold the consumer business to Fleet in 1998 and received a 4.99% ownership stake in this entity as part of the transaction.  Advanta's stake was diluted to 1.3% of FCCS in 2004 when Bank of America entered the picture.  As of Advanta's last 10-Q, in Q309, Advanta carried the ownership stake on the books at $31 million.  To give a sense of the earnings power of FCCS, Advanta received the following dividend payments during 2004 - 2008:

Year

2004

2005

2006

2007

20008

Dividend ($ mm)

2.5

1.9

1.2

2.6

2.2

Our low, mid and high estimates value the ownership stake at 33%, 50% and 67% of book value or 5x, 8x and 10x the average cash flow received over the past 5 years.

3rd party litigation and D&O insurance:  The total amount of coverage is unknown, but Advanta holds over 30 D&O and umbrella insurance policies.  We estimate $5 - 35 million recovery.  This assumes about $50 million in D&O insurance and 10 - 70% is recovery via litigation.  Former CEO Dennis Alter was known for his extravagant spending and holds substantial personal assets (see http://www.phillymag.com/articles/dennis_alter_and_the_tragedy_of_advanta/)  Recovery from other third parties, such as auditors (KPMG was the auditor and the Big 4 typically carry around $100 million of coverage) presents an opportunity for additional recovery.

Company-owned life insurance policies:  $8.5 million stated value for company-owned life insurance policies.  Additional policy premiums undisclosed, thus additional upside is possible.

Artwork:  Numerous pieces of art, books and other collectibles are valued at the purchase price of $4 million, giving no credit for potential appreciation.  For example, the most valuable piece, Morris Louis's "SAF" was purchased by Advanta for almost $1 million in 2004 and may have appreciated in value.  But to be conservative, we assume the art is liquidated at 50% of original purchase price, or slightly over $2 million of recovered value.

NOL carry forward:  Assuming the FDIC return is accepted, Advanta should retain an approximate $400 million NOL.  We assign no value to this asset, but believe monetization of the NOL is possible and could offer substantial upside.

CLAIMS

The claims within the estate consist of approximately $137 million of senior notes (inclusive of pre-petition accrued interest), $96 million of trust preferred securities (including accrued interest), and about $5.5 million of other general unsecured claims (trade claims, leases, etc.)

 

  • Senior notes: $137 million of senior notes outstanding. These notes, primarily "Advanta Investment Notes" with varying maturities and coupon rates, were advertised in newspapers (often resembling higher rate CDs) and sold directly to retail investors.
  • TRUPs: $96 million of 8.99% trust preferred securities outstanding. These notes were originally issued in 1996 and are subordinate to the senior notes.
  • Trade claims: $5.5 million of assorted trade creditor claims.
  • FDIC claim: The FDIC claims will total either $0 or $50 million depending on whether the IRS accepts the FDIC's amended return. We think there is little chance that the IRS rejects the FDIC amended return given the mutual agreement between the FDIC and Advanta. We believe the 20% probability assigned to this outcome in our expected value calc to be conservative.

SUMMARY

  • Worst case (5%): Haircuts the Visa B shares by 30%, Fleet Services by 67%, artwork by 50% and assigns $5 million to recovery from D&O insurance. Assumes IRS rejects the FDIC's amended return. Implies 7% recovery for the Trups.
  • Low case (15%): Haircuts the Visa B shares by 20%, Fleet Services by 50%, artwork by 50% and assigns $20 million to recovery from D&O litigation. Assumes IRS rejects the FDIC's amended return. Implies 28% recovery for the Trups.
  • Base case (50%): Haircuts the Visa B shares by 20%, Fleet Services by 50%, artwork by 50% and assigns $20 million to recovery from D&O litigation. Assumes IRS accepts the FDIC's amended return. Implies 69% recovery for the Trups.
  • Best case (30%): Haircuts the Visa B shares by 10%, Fleet Services by 33%, artwork by 50% and assigns $35 million to recovery from D&O litigation. Assumes IRS accepts the FDIC's amended return. Implies 93% recovery for the Trups.
  • Expected Value = 67% recovery or ~5x current price of 14.

CATALYSTS / UPSIDE

  • IRS acceptance of FDIC tax returns
  • Sale of Fleet Credit Card Services, LP
  • D&O insurance recoveries and other third-party litigation
  • Increase in the market price of Visa shares
  • Other unknown sources

RISKS

  • IRS denies FDIC tax return
  • Rapid deterioration in credit card receivables
  • Decline in value of Visa shares

Disclosure: We and our affiliates are long Advanta.  We may buy or sell securities in the future.  This is not a recommendation to buy or sell securities.


ADVANTA CORP.

                         

Recovery Analysis

                         
                                     

WORST

 

OKAY

                                     

Asset Assumptions

                         

Asset

     

Value

Haircut

Adj Val

 

Asset

     

Value

Haircut

Adj Val

Credit card receivables

       

Credit card receivables

     
 

Performing

27.4

5%

26.1

   

Performing

27.4

5%

26.1

 

30 - 60 days

1.6

25%

1.2

   

30 - 60 days

1.6

25%

1.2

 

61 - 90 days

1.1

50%

0.6

   

61 - 90 days

1.1

50%

0.6

 

91+ days

0.9

100%

0.0

   

91+ days

0.9

100%

0.0

Visa B shares

19.4

30%

13.6

 

Visa B shares

19.4

20%

15.6

Fleet CC Svcs, LP

32.1

67%

10.6

 

Fleet CC Svcs, LP

32.1

50%

16.0

Artwork

   

4.3

50%

2.2

 

Artwork

   

4.3

50%

2.2

                                     

Other

             

Other

           
 

Preferences and prepaid expenses

4.0

   

Preferences

   

4.0

 

D&O and 3rd-party litigation recoveries

5.0

   

D&O and 3rd-party litigation recoveries

20.0

 

NOL carryfwd

   

0.0

   

NOL carryfwd

   

0.0

                                     
                                     

ASSETS

     

AMT

 

ASSETS

     

AMT

Cash

         

108.4

 

Cash

         

108.4

Tax refund

   

3.4

 

Tax refund

   

3.4

CC receivables

   

27.8

 

CC receivables

   

27.8

497k Visa B shares

(30% discount)

13.6

 

497,000 Visa B shares

(20% discount)

15.6

1.3% of Fleet CC Svcs

(33% of BV)

10.6

 

1.3% of Fleet CC Svcs

(50% of BV)

16.0

COLI

         

8.5

 

COLI

         

8.5

Artwork

   

(50% original cost)

2.2

 

Artwork

   

(50% original cost)

2.2

Other

         

9.0

 

Other

         

24.0

TOTAL

 

 

 

 

183.5

 

TOTAL

 

 

 

 

205.9

                                     

PRIORITY

   

AMT

 

PRIORITY

   

AMT

Incremental professional fees

 

6.0

 

Incremental professional fees

 

6.0

TOTAL

 

 

 

 

6.0

 

TOTAL

 

 

 

 

6.0

                                     

GUCs

       

AMT

 

GUCs

       

AMT

Senior Notes

   

137.0

 

Senior Notes

   

137.0

Trups

         

96.4

 

Trups

         

96.4

Trade claims

   

5.5

 

Trade claims

   

5.5

FDIC settlement claim

 

50.0

 

FDIC settlement claim

 

50.0

TOTAL

 

 

 

 

288.9

 

TOTAL

 

 

 

 

288.9

                                     

Recovery (including subordination)

                     
         

Claim

Recovery

Resid val

%

           

Claim

Recovery

Resid val

%

             

183

                 

206

 

Priority

 

6

6

177

100%

 

Priority

 

6

6

200

100%

GUCs

   

289

177

0

61%

 

GUCs

   

289

200

0

69%

                                     

GUCs, pro rata

       

GUCs, pro rata

     

Snr notes

 

84

 

61%

 

Snr notes

 

95

 

69%

Trups

     

59

 

61%

 

Trups

     

67

 

69%

                                     

Snr notes, pro rata

84

     

Snr notes, pro rata

95

   

+ Trups clawback

53

     

+ Trups clawback

42

   

Snr notes, recovery

137

 

100%

 

Snr notes, recovery

137

 

100%

                                     

Trups, pro rata

59

     

Trups, pro rata

67

   

- Snr notes clawback

-53

     

- Snr notes clawback

-42

   

Trups, recovery

6

 

7%

 

Trups, recovery

24

 

28%

                                     

TRUPS RECOVERY

 

 

7%

 

TRUPS RECOVERY

 

 

28%

 

GOOD

 

GREAT

                                     

Asset Assumptions

                         

Asset

     

Value

Haircut

Adj Val

 

Asset

     

Value

Haircut

Adj Val

Credit card receivables

       

Credit card receivables

     
 

Performing

27.4

5%

26.1

   

Performing

27.4

5%

26.1

 

30 - 60 days

1.6

25%

1.2

   

30 - 60 days

1.6

25%

1.2

 

61 - 90 days

1.1

50%

0.6

   

61 - 90 days

1.1

50%

0.6

 

91+ days

0.9

100%

0.0

   

91+ days

0.9

100%

0.0

Visa B shares

19.4

20%

15.6

 

Visa B shares

19.4

10%

17.5

Fleet CC Svcs, LP

32.1

50%

16.0

 

Fleet CC Svcs, LP

32.1

33%

21.5

Artwork

   

4.3

50%

2.2

 

Artwork

   

4.3

50%

2.2

                                     

Other

             

Other

           
 

Preferences

   

4.0

   

Preferences

   

4.0

 

D&O and 3rd-party litigation recoveries

20.0

   

D&O and 3rd-party litigation recoveries

35.0

 

NOL carryfwd

   

0.0

   

NOL carryfwd

   

0.0

                                     
                                     

ASSETS

     

AMT

 

ASSETS

     

AMT

Cash

         

108.4

 

Cash

         

108.4

Tax refund

   

6.5

 

Tax refund

   

6.5

CC receivables

   

27.8

 

CC receivables

   

27.8

497,000 Visa B shares

(20% discount)

15.6

 

497,000 Visa B shares

(10% discount)

17.5

1.3% of Fleet CC Svcs

(50% of BV)

16.0

 

1.3% of Fleet CC Svcs

(67% of BV)

21.5

COLI

         

8.5

 

COLI

         

8.5

Artwork

   

(50% original cost)

2.2

 

Artwork

   

(50% original cost)

2.2

Other

         

24.0

 

Other

         

39.0

TOTAL

 

 

 

 

209.0

 

TOTAL

 

 

 

 

231.4

                                     

PRIORITY

   

AMT

 

PRIORITY

   

AMT

Incremental professional fees

 

6.0

 

Incremental professional fees

 

6.0

TOTAL

 

 

 

 

6.0

 

TOTAL

 

 

 

 

6.0

                                     

GUCs

       

AMT

 

GUCs

       

AMT

Senior Notes

   

137.0

 

Senior Notes

   

137.0

Trups

         

96.4

 

Trups

         

96.4

Trade claims

   

5.5

 

Trade claims

   

5.5

FDIC settlement claim

 

0.0

 

FDIC settlement claim

 

0.0

TOTAL

 

 

 

 

238.9

 

TOTAL

 

 

 

 

238.9

                                     
                                     
         

Claim

Recovery

Resid val

%

           

Claim

Recovery

Resid val

%

             

209

                 

231

 

Priority

 

6

6

203

100%

 

Priority

 

6

6

225

100%

GUCs

   

239

203

0

85%

 

GUCs

   

239

225

0

94%

                                     

GUCs, pro rata

       

GUCs, pro rata

     

Snr notes

 

116

 

85%

 

Snr notes

 

129

 

94%

Trups

     

82

 

85%

 

Trups

     

91

 

94%

                                     

Snr notes, pro rata

116

     

Snr notes, pro rata

129

   

+ Trups clawback

21

     

+ Trups clawback

8

   

Snr notes, recovery

137

 

100%

 

Snr notes, recovery

137

 

100%

                                     

Trups, pro rata

82

     

Trups, pro rata

91

   

- Snr notes clawback

-21

     

- Snr notes clawback

-8

   

Trups, recovery

61

 

69%

 

Trups, recovery

83

 

93%

Catalyst

 
    sort by   Expand   New

    Description

    OVERVIEW

    An investment in the Advanta 8.99% Trust Preferreds due 2026 offers investors the opportunity to earn multiples on their investment with minimal downside risk.  A recent settlement with the FDIC greatly reduces the downside for the Trups, shortens the duration of the reorganization, and reduces professional fees.

    For those familiar with the defunct bank holding company reorganization (Washington Mutual, Fremont, etc) the facts in Advanta will sound familiar.  The key assets include cash, receivables, securities, tax refunds, and litigation recoveries.  The key claimants are bondholders, trade creditors and the FDIC.  At the outset, the key risk for unsecured creditors was an adverse outcome in litigation with the FDIC, but this risk has now been eliminated.

    BACKGROUND

    Advanta., a subprime credit card issuer catering to small businesses, entered Chapter 11 following a severe increase in delinquencies and charge offs as the economic downturn impacted its customer base.  Incorporated in 1974 as Teachers Service Organization, Advanta's most recent business model took hold in the mid 1990s.  Advanta issued credit cards to small business owners unable to receive credit from more traditional lenders like American Express.  Advanta's advanced credit and sourced funds from its wholly-owned sub, Advanta Bank Corp., a Utah-based industrial bank. As an industrial bank, ABC did not take deposits and funded its balance sheet with high-cost brokered CDs.  As the economic downturn accelerated, charge offs and delinquencies increased.  As these credit problems ramped, Advanta's cash burn increased and its capitalization at ABC rapidly deteriorated.  Soon, ABC was subject to a cease and desist order from the FDIC and was restricted from issuing new credit. With limited options for additional liquidity, Advanta Corp filed for Chapter 11 on November 8, 2009.

     

    FDIC LITIGATION & SETTLEMENT

    Despite Advanta's November 2009 bankruptcy filing, Advanta Bank Corp was not seized until March 19, 2010.  By this time, Advanta Corp had already completed numerous tasks within its reorganization, including the filing of its 2009 and amended 2008 tax returns.  Of note, Advanta structured its tax filings in a way that reduced the aggregate refund, but also limited the size of FDIC's claim for the portion of the refund owed to ABC.   (Advanta Corp and all of its subsidiaries, including ABC, operated under a tax sharing agreement which specified that each subsidiary pay/receive taxes as if the sub had filed a tax return on its own.)  The FDIC strongly opposed Advanta's tax strategy, and sought permission to file its own tax returns.  The FDIC argued that Advanta should have filed to receive a larger aggregate refund (based on ABC's losses).  However, if this strategy was accepted, Advanta countered, the FDIC would receive a large unsecured claim, to the detriment of all of Advanta's other creditors.  This set the stage for a protracted fight between the FDIC and Advanta.

     

    However, as the preliminary hearings began last week, Advanta and the FDIC reached a settlement that resolved the tax dispute and included a mutual release of any additional litigation between the two.  The settlement agreement specifies:

    • The FDIC receives permission to file its own tax returns, which request the larger refund based on ABC's losses in 2009
    • If the IRS accepts the amended returns, 90% of the incremental refund will go directly to the FDIC and 10% will go to Advanta Corp.
    • If the IRS rejects the amended returns, the FDIC will receive an unsecured claim for $50 million.
    • Both Advanta and the FDIC agree to mutually release each other from any further claims going forward.

     

    RECOVERY ANALYSIS

    Resolution of the litigation with the FDIC provides increased clarity into the potential recovery for Advanta's unsecured creditors.  Details of our assumptions for assets and claims are described below in more detail.

    ASSETS

    Cash:  $108 million of cash and equivalents.

    Tax refund:  $3 - 6 million incremental recovery expected.  (Final outcome determined by whether the IRS accepts the FDIC return).

    Credit card receivables:  $31 million of credit card receivables outstanding.  Almost all of the outstanding receivables are current pay.  Given that these receivables are currently amortizing a year after Advanta ceased advancing funds, we view the receivables to be very high quality. Our estimated recovery from receivables assumes:

    • 5% charge off rate for current pay receivables ($27.4 million balance)
    • 25% charge off for all balances 30 - 60 days delinquent ($1.6 million balance)
    • 50% charge off for all balances 61 - 90 days delinquent ($1.1 million balance)
    • 100% charge off for all balances 90+ days delinquent ($0.9 million balance)

    Visa B shares:  Advanta owns 497,000 Visa B shares, a specific share class issued to participants in the interchange network. B shares currently convert to 0.55 Visa A shares, but are restricted from conversion until the latter of March 2011 or the settlement of specific litigation.  In the interim, Visa B shares can transfer to other Visa B holders.  There are two primary inputs to determine the value of this asset:  potential increase in value of Visa A shares over time and the time value of money determined by the duration of the lock up.  Visa shares are trading about 5% above their 52-week low and about 40% below their 52-week high.  To keep it simple, we assume a 10 - 30% discount of the current value of converted B shares based on the current price of Visa.  This valuation assumes no increase in Visa's share price and a roughly 1 - 3 year duration of the lock up (discounted at a 10% rate).  Obviously, an increase in the value of Visa A shares, a shortened duration of the lock up, and a lower discount rate are all accretive to the recovery of the Trups.

    Fleet Services:  Advanta owns 1.3% of Fleet Credit Card Services, L.P., (FCCS) which is a carryover from its exit of the consumer credit business.  Advanta sold the consumer business to Fleet in 1998 and received a 4.99% ownership stake in this entity as part of the transaction.  Advanta's stake was diluted to 1.3% of FCCS in 2004 when Bank of America entered the picture.  As of Advanta's last 10-Q, in Q309, Advanta carried the ownership stake on the books at $31 million.  To give a sense of the earnings power of FCCS, Advanta received the following dividend payments during 2004 - 2008:

    Year

    2004

    2005

    2006

    2007

    20008

    Dividend ($ mm)

    2.5

    1.9

    1.2

    2.6

    2.2

    Our low, mid and high estimates value the ownership stake at 33%, 50% and 67% of book value or 5x, 8x and 10x the average cash flow received over the past 5 years.

    3rd party litigation and D&O insurance:  The total amount of coverage is unknown, but Advanta holds over 30 D&O and umbrella insurance policies.  We estimate $5 - 35 million recovery.  This assumes about $50 million in D&O insurance and 10 - 70% is recovery via litigation.  Former CEO Dennis Alter was known for his extravagant spending and holds substantial personal assets (see http://www.phillymag.com/articles/dennis_alter_and_the_tragedy_of_advanta/)  Recovery from other third parties, such as auditors (KPMG was the auditor and the Big 4 typically carry around $100 million of coverage) presents an opportunity for additional recovery.

    Company-owned life insurance policies:  $8.5 million stated value for company-owned life insurance policies.  Additional policy premiums undisclosed, thus additional upside is possible.

    Artwork:  Numerous pieces of art, books and other collectibles are valued at the purchase price of $4 million, giving no credit for potential appreciation.  For example, the most valuable piece, Morris Louis's "SAF" was purchased by Advanta for almost $1 million in 2004 and may have appreciated in value.  But to be conservative, we assume the art is liquidated at 50% of original purchase price, or slightly over $2 million of recovered value.

    NOL carry forward:  Assuming the FDIC return is accepted, Advanta should retain an approximate $400 million NOL.  We assign no value to this asset, but believe monetization of the NOL is possible and could offer substantial upside.

    CLAIMS

    The claims within the estate consist of approximately $137 million of senior notes (inclusive of pre-petition accrued interest), $96 million of trust preferred securities (including accrued interest), and about $5.5 million of other general unsecured claims (trade claims, leases, etc.)

     

    • Senior notes: $137 million of senior notes outstanding. These notes, primarily "Advanta Investment Notes" with varying maturities and coupon rates, were advertised in newspapers (often resembling higher rate CDs) and sold directly to retail investors.
    • TRUPs: $96 million of 8.99% trust preferred securities outstanding. These notes were originally issued in 1996 and are subordinate to the senior notes.
    • Trade claims: $5.5 million of assorted trade creditor claims.
    • FDIC claim: The FDIC claims will total either $0 or $50 million depending on whether the IRS accepts the FDIC's amended return. We think there is little chance that the IRS rejects the FDIC amended return given the mutual agreement between the FDIC and Advanta. We believe the 20% probability assigned to this outcome in our expected value calc to be conservative.

    SUMMARY

    • Worst case (5%): Haircuts the Visa B shares by 30%, Fleet Services by 67%, artwork by 50% and assigns $5 million to recovery from D&O insurance. Assumes IRS rejects the FDIC's amended return. Implies 7% recovery for the Trups.
    • Low case (15%): Haircuts the Visa B shares by 20%, Fleet Services by 50%, artwork by 50% and assigns $20 million to recovery from D&O litigation. Assumes IRS rejects the FDIC's amended return. Implies 28% recovery for the Trups.
    • Base case (50%): Haircuts the Visa B shares by 20%, Fleet Services by 50%, artwork by 50% and assigns $20 million to recovery from D&O litigation. Assumes IRS accepts the FDIC's amended return. Implies 69% recovery for the Trups.
    • Best case (30%): Haircuts the Visa B shares by 10%, Fleet Services by 33%, artwork by 50% and assigns $35 million to recovery from D&O litigation. Assumes IRS accepts the FDIC's amended return. Implies 93% recovery for the Trups.
    • Expected Value = 67% recovery or ~5x current price of 14.

    CATALYSTS / UPSIDE

    • IRS acceptance of FDIC tax returns
    • Sale of Fleet Credit Card Services, LP
    • D&O insurance recoveries and other third-party litigation
    • Increase in the market price of Visa shares
    • Other unknown sources

    RISKS

    • IRS denies FDIC tax return
    • Rapid deterioration in credit card receivables
    • Decline in value of Visa shares

    Disclosure: We and our affiliates are long Advanta.  We may buy or sell securities in the future.  This is not a recommendation to buy or sell securities.


    ADVANTA CORP.

                             

    Recovery Analysis

                             
                                         

    WORST

     

    OKAY

                                         

    Asset Assumptions

                             

    Asset

         

    Value

    Haircut

    Adj Val

     

    Asset

         

    Value

    Haircut

    Adj Val

    Credit card receivables

           

    Credit card receivables

         
     

    Performing

    27.4

    5%

    26.1

       

    Performing

    27.4

    5%

    26.1

     

    30 - 60 days

    1.6

    25%

    1.2

       

    30 - 60 days

    1.6

    25%

    1.2

     

    61 - 90 days

    1.1

    50%

    0.6

       

    61 - 90 days

    1.1

    50%

    0.6

     

    91+ days

    0.9

    100%

    0.0

       

    91+ days

    0.9

    100%

    0.0

    Visa B shares

    19.4

    30%

    13.6

     

    Visa B shares

    19.4

    20%

    15.6

    Fleet CC Svcs, LP

    32.1

    67%

    10.6

     

    Fleet CC Svcs, LP

    32.1

    50%

    16.0

    Artwork

       

    4.3

    50%

    2.2

     

    Artwork

       

    4.3

    50%

    2.2

                                         

    Other

                 

    Other

               
     

    Preferences and prepaid expenses

    4.0

       

    Preferences

       

    4.0

     

    D&O and 3rd-party litigation recoveries

    5.0

       

    D&O and 3rd-party litigation recoveries

    20.0

     

    NOL carryfwd

       

    0.0

       

    NOL carryfwd

       

    0.0

                                         
                                         

    ASSETS

         

    AMT

     

    ASSETS

         

    AMT

    Cash

             

    108.4

     

    Cash

             

    108.4

    Tax refund

       

    3.4

     

    Tax refund

       

    3.4

    CC receivables

       

    27.8

     

    CC receivables

       

    27.8

    497k Visa B shares

    (30% discount)

    13.6

     

    497,000 Visa B shares

    (20% discount)

    15.6

    1.3% of Fleet CC Svcs

    (33% of BV)

    10.6

     

    1.3% of Fleet CC Svcs

    (50% of BV)

    16.0

    COLI

             

    8.5

     

    COLI

             

    8.5

    Artwork

       

    (50% original cost)

    2.2

     

    Artwork

       

    (50% original cost)

    2.2

    Other

             

    9.0

     

    Other

             

    24.0

    TOTAL

     

     

     

     

    183.5

     

    TOTAL

     

     

     

     

    205.9

                                         

    PRIORITY

       

    AMT

     

    PRIORITY

       

    AMT

    Incremental professional fees

     

    6.0

     

    Incremental professional fees

     

    6.0

    TOTAL

     

     

     

     

    6.0

     

    TOTAL

     

     

     

     

    6.0

                                         

    GUCs

           

    AMT

     

    GUCs

           

    AMT

    Senior Notes

       

    137.0

     

    Senior Notes

       

    137.0

    Trups

             

    96.4

     

    Trups

             

    96.4

    Trade claims

       

    5.5

     

    Trade claims

       

    5.5

    FDIC settlement claim

     

    50.0

     

    FDIC settlement claim

     

    50.0

    TOTAL

     

     

     

     

    288.9

     

    TOTAL

     

     

     

     

    288.9

                                         

    Recovery (including subordination)

                         
             

    Claim

    Recovery

    Resid val

    %

               

    Claim

    Recovery

    Resid val

    %

                 

    183

                     

    206

     

    Priority

     

    6

    6

    177

    100%

     

    Priority

     

    6

    6

    200

    100%

    GUCs

       

    289

    177

    0

    61%

     

    GUCs

       

    289

    200

    0

    69%

                                         

    GUCs, pro rata

           

    GUCs, pro rata

         

    Snr notes

     

    84

     

    61%

     

    Snr notes

     

    95

     

    69%

    Trups

         

    59

     

    61%

     

    Trups

         

    67

     

    69%

                                         

    Snr notes, pro rata

    84

         

    Snr notes, pro rata

    95

       

    + Trups clawback

    53

         

    + Trups clawback

    42

       

    Snr notes, recovery

    137

     

    100%

     

    Snr notes, recovery

    137

     

    100%

                                         

    Trups, pro rata

    59

         

    Trups, pro rata

    67

       

    - Snr notes clawback

    -53

         

    - Snr notes clawback

    -42

       

    Trups, recovery

    6

     

    7%

     

    Trups, recovery

    24

     

    28%

                                         

    TRUPS RECOVERY

     

     

    7%

     

    TRUPS RECOVERY

     

     

    28%

     

    GOOD

     

    GREAT

                                         

    Asset Assumptions

                             

    Asset

         

    Value

    Haircut

    Adj Val

     

    Asset

         

    Value

    Haircut

    Adj Val

    Credit card receivables

           

    Credit card receivables

         
     

    Performing

    27.4

    5%

    26.1

       

    Performing

    27.4

    5%

    26.1

     

    30 - 60 days

    1.6

    25%

    1.2

       

    30 - 60 days

    1.6

    25%

    1.2

     

    61 - 90 days

    1.1

    50%

    0.6

       

    61 - 90 days

    1.1

    50%

    0.6

     

    91+ days

    0.9

    100%

    0.0

       

    91+ days

    0.9

    100%

    0.0

    Visa B shares

    19.4

    20%

    15.6

     

    Visa B shares

    19.4

    10%

    17.5

    Fleet CC Svcs, LP

    32.1

    50%

    16.0

     

    Fleet CC Svcs, LP

    32.1

    33%

    21.5

    Artwork

       

    4.3

    50%

    2.2

     

    Artwork

       

    4.3

    50%

    2.2

                                         

    Other

                 

    Other

               
     

    Preferences

       

    4.0

       

    Preferences

       

    4.0

     

    D&O and 3rd-party litigation recoveries

    20.0

       

    D&O and 3rd-party litigation recoveries

    35.0

     

    NOL carryfwd

       

    0.0

       

    NOL carryfwd

       

    0.0

                                         
                                         

    ASSETS

         

    AMT

     

    ASSETS

         

    AMT

    Cash

             

    108.4

     

    Cash

             

    108.4

    Tax refund

       

    6.5

     

    Tax refund

       

    6.5

    CC receivables

       

    27.8

     

    CC receivables

       

    27.8

    497,000 Visa B shares

    (20% discount)

    15.6

     

    497,000 Visa B shares

    (10% discount)

    17.5

    1.3% of Fleet CC Svcs

    (50% of BV)

    16.0

     

    1.3% of Fleet CC Svcs

    (67% of BV)

    21.5

    COLI

             

    8.5

     

    COLI

             

    8.5

    Artwork

       

    (50% original cost)

    2.2

     

    Artwork

       

    (50% original cost)

    2.2

    Other

             

    24.0

     

    Other

             

    39.0

    TOTAL

     

     

     

     

    209.0

     

    TOTAL

     

     

     

     

    231.4

                                         

    PRIORITY

       

    AMT

     

    PRIORITY

       

    AMT

    Incremental professional fees

     

    6.0

     

    Incremental professional fees

     

    6.0

    TOTAL

     

     

     

     

    6.0

     

    TOTAL

     

     

     

     

    6.0

                                         

    GUCs

           

    AMT

     

    GUCs

           

    AMT

    Senior Notes

       

    137.0

     

    Senior Notes

       

    137.0

    Trups

             

    96.4

     

    Trups

             

    96.4

    Trade claims

       

    5.5

     

    Trade claims

       

    5.5

    FDIC settlement claim

     

    0.0

     

    FDIC settlement claim

     

    0.0

    TOTAL

     

     

     

     

    238.9

     

    TOTAL

     

     

     

     

    238.9

                                         
                                         
             

    Claim

    Recovery

    Resid val

    %

               

    Claim

    Recovery

    Resid val

    %

                 

    209

                     

    231

     

    Priority

     

    6

    6

    203

    100%

     

    Priority

     

    6

    6

    225

    100%

    GUCs

       

    239

    203

    0

    85%

     

    GUCs

       

    239

    225

    0

    94%

                                         

    GUCs, pro rata

           

    GUCs, pro rata

         

    Snr notes

     

    116

     

    85%

     

    Snr notes

     

    129

     

    94%

    Trups

         

    82

     

    85%

     

    Trups

         

    91

     

    94%

                                         

    Snr notes, pro rata

    116

         

    Snr notes, pro rata

    129

       

    + Trups clawback

    21

         

    + Trups clawback

    8

       

    Snr notes, recovery

    137

     

    100%

     

    Snr notes, recovery

    137

     

    100%

                                         

    Trups, pro rata

    82

         

    Trups, pro rata

    91

       

    - Snr notes clawback

    -21

         

    - Snr notes clawback

    -8

       

    Trups, recovery

    61

     

    69%

     

    Trups, recovery

    83

     

    93%

    Catalyst

     

    Messages


    SubjectRecovery analysis
    Entry08/30/2010 06:14 PM
    MemberSiren81
    Good work. Quick question on the recovery analysis at the end to follow-up on Utah's questions... 

    If the IRS does not accept the claim, then Advanta would not get the $3.4m in refund proceeds, correct? I think in your analysis you include this $3.4m

    My understanding is the TruPS are subordinated to all creditor claims. So if we look at your "Okay" scenario, there's $205.9m in assets - then we subtract priority ($6m), Sr. Notes ($137m), Trade ($5.5m) and FDIC ($50m). This leaves $7.4m for TruPS or 8%... am I missing something?

    Thanks for the help...


    SubjectRE: IRS
    Entry08/31/2010 08:22 AM
    Membersamba834
    Utah,
     
    Tough to handicap IRS view historically because it's a pretty unique set of facts.  However, there are specific IRS regs that, in some cases, allow the FDIC to file separate returns or amend filings by the parent.  Given mutual agreement here, we think there is a fairly high probability the IRS will accept the amended returns and our 20% probability of non-acceptance is reasonably conservative. 
     
    Regarding tax refund:  agreement relates to the incremental 2009 refund.  If the IRS does not accept the amended return, there is still a small incremental refund due to amended 08 return and that will be captured by holding company.
     
    Finally, this is essentially a liquidating Chapter 11.  Not clear which assets/entities may be reorg'd going forward.  TBD.  No plans filed yet, the litigation with FDIC was the primary issue to date.  The mutual release clears path to move forward with Plan.  Great professionals managing the case (Weil Gotshal and Alvarez & Marsal for Advanta and Latham and FTI for creditors).

    SubjectRE: Recovery analysis
    Entry08/31/2010 08:26 AM
    Membersamba834
    Siren,
     
    Re TruPS, our view is that they are subordinated to senior notes but pari with trade claims.  So we calculate recovery using clawback between the senior notes and the TruPS.

    SubjectRE: RE: Recovery analysis
    Entry08/31/2010 09:59 AM
    MemberSiren81
    Thanks Samba -

    Why do you think the TruPS would be pari with trade? Have you confirmed with the professionals here? The TruPS indenture clearly states that they are subordinated to all Senior Debt... and if you look in the RediReserve prospectus it says:

     

    "Q: RediReserve certificates and investment notes are senior unsecured debt securities. What does "senior unsecured" mean?  

    A:   "Senior unsecured" refers to the priority in right of repayment in the event we are involved in a bankruptcy, liquidation, dissolution, reorganization or similar proceeding, or upon a default in payment on, or the acceleration of, any of our secured debt. In such event, the RediReserve certificates and investment notes would rank as follows in priority for repayment:

    RediReserve certificates and investment notes would be paid after any secured debt of Advanta Corp. 

    RediReserve certificates and investment notes rank equally with and would be paid pro rata with our other senior unsecured debt, including, but not limited to, other senior unsecured debt securities and trade payable".   


    SubjectRE: RE: RE: Recovery analysis
    Entry08/31/2010 10:39 AM
    Membersamba834
    Our view is based on reading of the TruPS docs.. the TruPS are subordinate to "Senior Indebtedness" which is defined as "Indebtedness for Money Borrowed," in turn defined as "any obligation for the repayment of borrowed money."  Also, the guarantee agreement separates "borrowed money" from "all other liabilities" of Advanta.  We do not believe trade claims will be treated as indebtednss for "borrowed money" a term that references a loan, bond, note or similar instrument. 
     
    More importantly, even if one thinks the minimal amount of trade claims are treated senior, there little to no chance that the FDIC unsecured claim would be treated as "borrowed money" and therefore senior to TrUPs (as you assumed in your recovery).  The FDIC claim would likely be a pari claim (see the settlement agreement filed for more details on the terms of the FDIC claim).
     
    Lastly, again, we view the addition of an FDIC claim to be a very low probability event.  Thus, the treatment of the small amount of trade claims as senior to the TrUPs does not have a huge impact on recovery (although we believe these claims will deemed to be pari). 
     
    In our view, the recovery will be multiples of the current price if the IRS accepts the amended return, and there is possibility to earn a substantial return even with an FDIC claim, as long as asset recoveries
    are not extremely impaired.

    SubjectRE: RE: RE: RE: Recovery analysis
    Entry08/31/2010 01:28 PM
    MemberSiren81
      

    Not trying to be a jerk, but I disagree with your reading of the indenture. The document seems pretty clear that in event of default, the TruPS are subordinated to "all liabilities" which would include trade and the FDIC claim:

     

    "in the case of a bankruptcy or insolvency proceeding in respect of the Corporation, in which case the New Guarantee will rank subordinate and junior in right of payment to all liabilities (other than the Old Guarantee and Other Guarantees) of the Corporation."

     

    This matters because if the IRS rejects the refund, these TruPS are likely a $0 (your assumed priority # seems very low - Weil bills $6m for a cab ride and there's already $12m of post-petition liabilities as of the last MOR). Like you, I believe such a rejection is "unlikely" but have no way to handicap this outcome

     

    Again, I'm not trying to be an ass, just trying to figure this out.

    SubjectRE: RE: RE: RE: Recovery analysis
    Entry08/31/2010 01:29 PM
    MemberSiren81
    Sorry, here's what i ment to say... 

    Not trying to be a jerk, but I disagree with your reading of the indenture. The document seems pretty clear that in event of default, the TruPS are subordinated to "all liabilities" which would include trade and the FDIC claim:

    "in the case of a bankruptcy or insolvency proceeding in respect of the Corporation, in which case the New Guarantee will rank subordinate and junior in right of payment to all liabilities (other than the Old Guarantee and Other Guarantees) of the Corporation."

    This matters because if the IRS rejects the refund, these TruPS are likely a $0 (your assumed priority # seems very low - Weil bills $6m for a cab ride and there's already $12m of post-petition liabilities as of the last MOR). Like you, I believe such a rejection is "unlikely" but have no way to handicap this outcome

    Again, I'm not trying to be an ass, just trying to figure this out.


    SubjectRE: RE: RE: RE: RE: Recovery analysis
    Entry09/01/2010 08:38 AM
    Membersamba834
    I don't mind the debate...
     
    But I have to disagree with your reading though - you are referencing the guarantee agreement.  I'm referencing the indenture.
     
    In the subordination section of the Indenture, Section 15.01, it states:  "subordinated and junior in right of payment to... all Senior Indebtedness..."
     
    "Senior Indebtedness" is defined as: "all Indebtedness for Money Borrowed"
     
    "Indebtedness for Money Borrowed" is defined as:  "any obligation of... the Company for the repayment of borrowed money..."
     
    "Company" is defined as "Advanta Corp."
     
    Again, to handicap the IRS, I'd suggest reviewing some of the provisions related to failed banks and the filing of returns by FDIC compared to the holding company.  Nothing is clear cut with the IRS though, we think a 20% chance of denial is a reasonable estimate.
     
    With regard to professional fees, in our view the end of litigation with the FDIC clears the way for a quick plan and limits the incremental fees. 
     
     
     
     

    SubjectWhere to buy?
    Entry09/06/2010 09:01 AM
    Memberdavid101
    Samba,
     
    Do these trups trade on any exchanges or are they all private transaction? Any sources to locate these securities?
     
    Thanks,
     
    David

    SubjectRE: RE: RE: RE: RE: RE: Recovery analysis
    Entry09/07/2010 03:50 PM
    MemberSiren81
     Your reading of the indenture is correct, except that in article 15 it says:

    "It is understood that the provisions of this Article Fifteen are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness on the other hand.

    Nothing contained in this Article Fifteen or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Securities""

    As such, the indenture does not address GUC other than sr. notes. Rather I believe the trade is senior to the TruPS because: 1) the sr notes prospectus explicitly says the seniors are pari with trade, 2) In the event of an unfavorable IRS ruling, I doubt the FDIC would agree to a claim with an expected less than full payment, 3) I've never seen anything called "Junior Subordinated" pari with trade (ok, this is a bad point).

    As far as fees, there is $11m post-petition A/P as of last MOR so even if there's $6m more, that's total fees of $17m.

    I'm willing to "agree to disagree" on these points...

    That said, even using my assumptions I still get an expected value 3 - 4x current levels. Very good work on this


    SubjectRE: Where to buy?
    Entry09/10/2010 08:27 AM
    Membersamba834
    OTC - your typical distressed debt OTC broker.

    SubjectRE: Trups Holders
    Entry09/10/2010 08:28 AM
    Membersamba834
    Latham/FTI are advisors to Unsecured Creditors Committee.  Both the trustee for senior notes and Trups sit on the committee. 

    SubjectRE: RE: RE: RE: RE: RE: RE: Recovery analysis
    Entry09/10/2010 08:39 AM
    Membersamba834
    Thank you.

    SubjectUpdate - favorable sale of Advanta Insurance sub
    Entry10/08/2010 01:56 PM
    Membersamba834
    Advanta Corp announced it has sold its insurance subsidiary to an insurance sub of ADM for about $6mm (about $5.5mm of book value consisting of bonds and cash plus $0.5mm premium for state licenses, etc).
     
    Note, this is incremental value not directly allocated to our waterfall (it was unclear when these assets would be freed up within an entity that was burning cash).  The $6mm goes a long way in this capital structure.
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