NextCard Looking for a Buyer, Facing Lawsuit

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Online credit card issuer NextCard Inc. is looking for a buyer and has retained Goldman Sachs & Co. to shop the company around. NextCard said it hopes to be sold to a larger financial institution with the resources necessary to keep it in business.


The company, which is based in San Francisco, blamed its decision to sell the company on regulators, who recently tightened lending restrictions after examiners uncovered a number of bad loans by NextCard. The regulators, who deemed the company "significantly undercapitalized," forced it to curtail its lending activities and increase its loan loss reserves.


NextCard said it needs $140 million to meet the bank regulators' capital requirements. The company also said that it cannot make most business decisions without their prior approval and is no longer able to acquire funds by loan securitization or by taking deposits.


Meredith Whitney, an analyst at Wachovia Securities, does not think selling NextCard will be easy.


"Unfortunately for both NextCard as well as Goldman Sachs, we hold little hope for a potential sale," Whitney said. "Funding is the most critical concern for any company, and it appears that this company's funding prospective is severely in question."


NextCard is the largest online credit card issuer in the United States and acquires its customers completely online through banner advertisements and co-branding arrangements.


To meet regulators' requirements, NextCard said it will limit new account originations, suspend originations of secured credit cards, and either suspend or limit certain repricing programs and fee-based product strategies.


As if that was not enough bad news for NextCard, the company also is facing a class-action suit alleging it made "false and misleading statements" by categorizing itself as "well capitalized."


The suit was filed Oct. 1 in the United States District Court for the Northern District of Illinois on behalf of all purchasers of NextCard Inc. common stock between March 30, 2000 and Oct. 30, 2001. The suit alleges NextCard "purposely mischaracterized its true loan loss levels in order to qualify for the most beneficial insurance treatment and cost of funds," when in fact it was experiencing "ever increasing loan defaults."


"When NextCard revealed on Oct. 31, 2001 that its banking division was in fact 'significantly undercapitalized', that it had failed to provide sufficient reserves for delinquent loans and that it had inadequately characterized its true credit losses, the stock collapsed -- wiping out 84 percent of market value in just one day and causing plaintiff and the other members of the class to suffer damages," the suit alleges.


The lawsuit seeks unspecified monetary damages and a jury trial. No one from NextCard was available to comment.


For the third quarter, NextCard reported a net loss of $53.1 million, or $1 per share, up from a loss of $20.2 million, or 38 cents per share a year earlier. Total revenue for the third quarter was $95.7 million, up from $56.9 million in 2000. The bank increased its loan loss reserves in the third quarter to $55.5 million, from $16.1 million a year ago.


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