Credit Spreads Thin On Household
Five-year credit protection on U.S. consumer finance firm Household International fought back to stand between 500-540 basis points last Wednesday, down 125bps on the previous week and recovering from a high of 900bps on Oct. 24. Equity and corporate bond rallies, combined with the effects of several collateralized debt obligations being issued, have tightened spreads, noted one trader. Anticipation of another interest rate cut in the U.S. has also peaked expectation of a continuing equity rally, which in turn has influenced spreads inward.
The U.S. financier's underlying borrower base is low income and higher risk individuals who in times of recession are more likely to default on payments. The firm also has a large sum of debt due to mature next year, which some question its ability to pay. In addition, Household recently faced a lawsuit from borrowers charging it with predatory lending, he noted.
The outlook for Household Finance Corp., which is the operating subsidiary for Household International, is stable although pressure about fundraising has increased concern, said Blaine Frantz, v.p. and senior analyst at Moody's Investors Service in New York, which rates the firm A2. The rating agency continues to view Household as a solid, well run firm, although its high degree of volatility is of some concern. The firm's ability to continue to fund itself and maintain liquidity are the most important factors driving its outlook, he added. Frantz discounted the lawsuit as a concern following an off the table settlement of the issue and said concerns about payment default by Household's borrowers were accounted for in the firm's fee structure.
Five-Year Credit Protection On Household