Credit analyst still sees downside to Providian

By Ronda Fears

Nashville, Tenn., Feb. 8 - With many unanswered questions about Providian Financial Corp.'s capital plan and further potential downgrades to the credit, Kathy Shanley, senior bond analyst with Gimme Credit, an independent research service for institutional investors on corporate bonds, said there is still downside risk to holding the company's paper.

"Providian says it strengthened liquidity by completing $2.8 billion in securitizations in December. But it concedes it only succeeded in funding the deals by retaining a larger subordinated interest than was typical on its prior transactions. The new securitizations also contain stringent triggers, including a provision for early amortization in the event Providian National Bank experiences credit rating downgrades," Shanley said in a report Friday.

"Since the risk of more downgrades can't be ruled out, we can only conclude Providian had little negotiating room in setting up its latest funding vehicles. We still see downside risk in this credit."

Even in this post-Enron world, Shanley said, Providian (B2/B) declined to take questions on its earnings call Thursday even though it announced some purportedly good news - the acceptance of its capital plan by bank regulators - along with its otherwise abysmal results. Providian also said it had completed the sale of the Providian Master Trust to JPMorgan Chase, freeing up cash, but leaving it with a lower quality mix of credit card receivables, the analyst said.

"We understand why Providian management wants to duck questions," Shanley said. "The net loss for the quarter totaled $481 million, reflecting about $1.0 billion in charges to boost reserves and cover various losses."

She said the list of Providian's special items includes $252 million to boost the loan loss reserve, a $134 million charge related to securitizations completed in the fourth quarter, a $164 million writedown of residual interests related to prior period securitizations, $303 million to increase the reserve for uncollectible finance charges and fees, a $133 million charge against operations in Argentina and $35 million to cover closing an operations center, along with a writedown of goodwill and intangibles.

"Though a small part of its problems, we view Providian's adventures in Argentina as emblematic of its whole approach to risk-taking. It bought a bank there just last March, and is now writing off more than the total amount in assets it reported ($92 million) at the end of the third quarter," Shanley siad.

"Talk about adverse selection. We shudder to think of the cash-starved Argentinian credit cardholders racking up bills over the past few dreadful months."

And, the good news in the quarter may be less than meets the eye, the analyst said, referring to the approval of Providian's capital plan by regulators.

"Federal bank regulators don't want a major bank failure on their watch, so it is in their interest to work with Providian to mitigate the potential loss exposure," Shanley said.

"In the fourth quarter, Providian's holding company contributed $260 million to its subsidiary banks to bolster capital. Without giving details, Providian discloses the capital plan reflects a reduction in deposit funding. Going forward, Providian plans to merge its two bank subsidiaries, and is committed to achieving a series of capital ratio targets. Although Providian says it has contingency plans to meet its goals, the hurdles give regulators the option of intervening if results fall short of expectations."

Similarly, the sale to JP Morgan is a boon to asset-backed investors and gives Providian an after-tax gain of over $300 million and cash proceeds in excess of $2.7 billion, the analyst said, but the premium paid on the $8.2 billion portfolio was relatively modest and now Providian is stripped of its best assets.

"Already the managed net credit loss rate was 12.7% in the fourth quarter, up from 10.3% in the third quarter. Excluding the assets sold to JPM, losses would have been 14.3%," Shanley said.

"Providian warns there will be a 'significant' increase in future net credit losses. Though the on-balance sheet allowance for losses totaled a fortress-like 16.8% at year end, we can't be sure even now that Providian's reserves are adequate."

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