Advanta High Yield Notes: 8.5% – 11% Yield Worth the Risk?

I continue to read with interest the advertisements in my local paper for these Advanta high yield investment notes.  Currently, they’re offering a 1 year note at 8.5%, a 2 year note at 10% and a 10 year note at 11%. These are exceedingly high yield investment notes, especially in light of the current low interest rate environment we find ourselves in.  Based on my recent post at Everyday Finance on the Best CD Yields in April 2009, you can’t even beat 3.5% at any maturity!

The adage here may very well hold “If it’s too good to be true, it probably is”.  We’ve seen investors burned by Madoff’s uncanny returns in any market and Stanford Financial’s ability to pay 7% CD yields.  Now, Advanta is a legitimate company.  The trouble is, these notes are not like your conventional CD, in that they’re not FDIC insured and the stock has declined substantially, like AIG substantially with shares running from the 30s in 2007 to less than $1 per share today.  Therefore, if the company goes down, holders of the these notes move to the end of the line behind other creditors and possibly bond holders, which for all intents and purposes means, you may very well lost your entire investment – principal on the investment note, plus whatever interest you had earned on the note.  The question is whether Advanta has the liquidity and staying power to outlast the current economic downturn.

Generally, when a distressed financial company is offering exorbitantly high yields on their products, it’s a sign that they’re willing to sacrifice long term profitability for near term survival.  We saw this with high yield CDs from Countrywide and Wachovia last year and you may very well be seeing it now in these high yield Advanta investment notes.

There are some additional caveats and find print in the ad and on their website. My commentary in “( )”

• There are only certain states that are eligible for participation
• Minimum investment in the Advanta notes is $5000
• We do not expect there will be a trading market for the investment notes or the RediReserve certificates. (once you buy them, you can’t sell them on a secondary market)
• There is no sinking fund, security, or guarantee for our obligation to make payments on the securities, so you will have to rely solely on our revenues from operations and other sources of funds for repayment. (red flag!)
• The non-investment grade ratings of our debt may hurt our ability to obtain funding for our operations on favorable terms and, as a result, our ability to repay indebtedness. (is this a downward spiral and that’s why they’re offering notes at any rate attractive enough to draw cash?)

Has anyone here ever invested with Advanta or with any non-FDIC insured company’s notes before?  Would be interested to hear your perspective on your risk mitigation and any other factors that drove you to forgo the safety of FDIC insured products.  I was thinking that perhaps you could buy puts on the cheap in order to hedge a run to zero with the excess income from the high yielding notes, but at these prices of less than $1, you can’t even get puts.

UPDATE MAY2009: See Advanta’s latest attempt to preserve capital to stem losses – read on and buyer beware:  Advanta Investment Notes in Peril?

Disclosure: I am not holding Advanta Investment Notes, nor do I intend to unless the market prices in a recovery with a share price of over $5 per share.

Tagged as: Advanta, CD, High Yield, Investment Notes