Lehman Brothers analysts are recommending investors scoop up bonds issued by independent private label credit card issuers, on the view the recent trend that has seen high-quality banks get into the credit card market will continue. This will result in improving the servicing of the assets and as a result should lead to tighter spreads on outstanding bonds, according to Lehman.
Consolidation has been a buzz word in the credit card industry of late, with some of the recently announced plans including been Washington Mutual's planned buy of Providian and Citigroup's intention to acquire Federated's portfolio. And more such moves are expected, with the general consensus the monoline credit card industry is undergoing a period of stress.
Lehman is tapping Metris and Discover as two likely acquisition candidates. "We would expect both credit card issuers eventually to be acquired by larger financial institutions," analyst Brian Zola wrote in a note to investors. He added investors will be able to realize future spread tightening by buying credit-backed bonds from Metris and Discover that would benefit from the improved servicing profile such an acquisition would likely result in.