A sell-side and an independent analyst say bonds of Countrywide Financial (A3/A) should continue to perform well even as rising interest rates slow the mortgage refinancing boom. Taking a cue from a recent Barron's article touting Washington Mutual's (A3/BBB+) stock, Vince Boberski, strategist at RBC Dain Rauscher, says Countrywide is a better buy for bondholders. He says Countrywide's mortgage servicing portfolio, which will benefit from rising rates, is roughly double that of Washington Mutual relative to their respective balance sheets. And, while Washington Mutual's higher dividend is good for stockholders, it is a negative on the bond side.
Another advantage to Countrywide is that it is better hedged against violent swings in interest rates, according to David Hendler, analyst at CreditSights. Hendler has a buy on Countrywide and is neutral on Washington Mutual. "Countrywide is set up to do loans like a factory. They get paid 40 basis points a month to make sure payment is processed correctly," he says. Countrywide's 5.5% notes of '06 were trading at 87 basis points over Treasurities last Tuesday, versus 84 for the Washington Mutual 7.5% notes of '06.
Van Hesser, analyst at HSBC Securities USA, is looking for decent spread performance from both Countrywide and Washington Mutual. "The best-in-class mortgage competitors should do well in the transition to a lower refinancing environment. They have strong risk managegment and a lot of resources like origination and marketing that puts the midsize players at risk." He says none of the midsize players are significant bond issuers however.