Credit analyst says continue to avoid Providian

By Ronda Fears

Nashville, Tenn., June 26 - While Providian Financial Corp. is making progress in its restructuring, Kathy Shanley, senior bond analyst with Gimme Credit, said to continue to avoid the credit.

Providian (B2/B) announced Tuesday completion of the structured sale of about $2.4 billion of high-risk credit card receivables, but the analyst noted it will report a $6 million after-tax loss on the sale, over and above the $240 million net charge it recognized in the first quarter.

"Providian is moving forward with its restructuring plans," Shanley said in a report Wednesday.

"But even excluding the receivables in the sale portfolio, managed credit losses were nearly 18% in May, suggesting it is early to celebrate a turnaround at the troubled credit card lender."

The structure of the receivables sale is unusually complex, she said.

Two limited liability companies formed by affiliates of Goldman Sachs, Salomon Smith Barney, Cardworks, Inc. and CompuCredit bought the receivables, with funding through a new securitization.

Providian National Bank received cash proceeds of $1.2 billion on the sale, which the analyst said will help maintain liquidity at the bank level.

Although Providian's liquidity position at April 30 was already seemingly healthy at $6 billion, including $600 million from the sale of operations in the U.K., its cash needs also are large.

Between May 1 and the end of this year, the company's funding requirements exceed $5 billion - $3 billion in deposits; $2.4 billion in maturing securitizations - even before considering any requirements for new asset growth.

At the end of the first quarter, Providian reclassed $2.65 billion of higher risk loans from loans receivable to loans held for sale, taking a $985 million markdown to record the assets at fair value.

To fund the write-down, Providian took a $388 million pretax charge in the first quarter and used existing loan loss reserves to cover the rest.

Its loan loss reserve fell to $1.4 billion from $1.9 billion.

"Despite the extent of these charges, Providian will still take a small additional loss on the portfolio, reflecting a further deterioration in the carrying value of the assets since the end of the first quarter," Shanley noted.

As part of the sale agreement, Providian retains some exposure to the receivables being sold, through its ownership of lower-rated classes of securities issued as part of the new securitization.

It holds about $87 million, or 49%, of the BB-/Ba2 rated notes, and $98 million, or 44%, of the BBB-/Baa2 rated certificates, the analyst said.

"If the performance of the credit card receivables in the sale portfolio continues to deteriorate in excess of expectations, it is possible Providian will face additional loss exposure," Shanley said.

By the time of the sale, outstanding balances in the portfolio had dropped to about $2.4 billion from $2.65 billion, reflecting attrition.

As part of the sale process, Providian notified its cardholders of modifications in lending terms, including changes in the annual percentage rate and in fees.

Customers had the option to opt out of the new terms, but only if they agreed not to charge any more new purchases.

"We can't tell how much of the recent drop reflects normal attrition as opposed to customers choosing to go elsewhere rather than accept the new terms, but the drop in balances suggests there is some risk that performance will continue to deteriorate," Shanley said.

"We view the completion of the sale as a small step in the right direction, but Providian's remaining portfolio is only modestly stronger than the assets it is moving off its books."

Credit losses in May were 17.63%, far above industry averages, and only 11 basis points improved from the April level.

"We don't see many more easy gains now that the major asset sales are completed," Shanley said, "and we would continue to avoid this name."

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