By Stephanie Gleason
Of DOW JONES DAILY BANKRUPTCY REVIEW
Online marketing and sales company Velo Holdings Inc. filed for Chapter 11 bankruptcy Monday amid demands from Visa Inc. (V) and its credit-card processor after the passage of a federal law quelling aggressive online marketing practices caused revenue to plummet.
"Facing the threats from Visa and Paymentech, among other things, the debtors in consultation with their advisors determined it was prudent to file for bankruptcy," Velo said in court documents.
Velo said it plans to auction two segments, its health insurance sales and lead generation businesses, while restructuring the credit and identity theft protection and retail businesses. Barclays Bank PLC, which holds the first-lien loan, will credit bid $80 million for the insurance business and $20 million for the lead generation business, Velo said.
The company is also asking the court to approve $40 million in bankruptcy financing from Barclays so it can continue operations during the Chapter 11 case.
Velo blamed, in part, tighter regulatory control of one of its online marketing practices for its strained finances. The method redirects customers who have completed a purchase on its discount retail website to another website, a Velo subsidiary that sells fraud and identity theft protection services, and asks the customer to enroll.
V2V Corp. sells these services on freescore.com, idenityhawk.com, creditfyi.com and debtplan.com for a monthly fee charged to the customer's credit card.
In late 2010, regulations surrounding this practice changed. Under the new law, merchants are required to ask customers to re-enter their entire credit-card numbers, as opposed to only the last four digits, to sign up and authorize Velo to automatically charge the card a monthly fee.
The change caused company-wide revenue to drop to $485 million in 2011 from $590.8 million in 2010.
As revenue fell and debt levels remained high--it has $385 million and $205 million in first and second lien credit facilities--Visa demanded that Velo implement a new risk identification metric by May 2012. Velo projected this would cost it $13 million in earnings, but Visa threatened to stop allowing Velo to accept Visa credit cards if it didn't comply.
Velo defaulted on both its credit facilities in December to avoid a liquidity crisis, it said, prompting Moody's Investors Services to downgrade the company's debt ratings. As a result, Chase Paymentech LLC, Velo's credit-card processor, notified Velo it would terminate their agreement on April 20.
Velo claimed between $100 million and $500 million in assets and between $500 million and $1 billion in liabilities in its bankruptcy petition. It also put 13 subsidiaries under Chapter 11 protection Monday.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
-Stephanie Gleason, Dow Jones Daily Bankruptcy Review; 202-862-1347; firstname.lastname@example.org