An independent analyst and a portfolio manager say last week's spread widening in the bonds of Household International has created an opportunity to add exposure to the credit. J.P. Weaver, portfolio manager of $1 billion in taxable fixed income at McGlinn Capital Management in Wyomissing, Pa., says he will add to the firm's holdings of Household five-year notes if they continue to widen a bit more, though he declined to give the specific level he was looking for. Last Wednesday morning, the 5.75% notes of '07 (A2/A-) widened some 70 basis points to 520 over Treasuries. McGlinn says Household's proposed $484 million settlement of predatory lending issues and stated commitments to increase its capital reserves give him confidence that the finance company will turn things around.
Kathy Shanley, analyst at Gimme Credit, is one of a number of Household-watchers who believes that last Wednesday's sell-off was due to a negative earnings report from Capital One Financial Corp. Capital One is operating under a greater burden of regulatory uncertainty, is seeing chargeoffs go up more sharply, and is trying to move upmarket where it will face stiffer competition. "These factors are all Capital One-specific, so yes, I agree that the spread widening [on Household] may be overdone," she says. She also believes that Household's predatory lending settlement is a positive for the credit, which made the bonds cheap even ahead of Wednesday's sell-off. Shanley declines to say how much upside there is in the bonds, however, as she says weakness is attributable both to credit-specific events and the overall economy.