Though the market appears to view initial concerns over the Aug. 14 earnings restatement by Household International as overblown, at least one independent analyst remains troubled by the news. Meanwhile, a sell-side analyst who has been bullish on Household all year continues to see major upside in the bonds.
Household's 5.75% notes of '07 closed at 280 basis points over Treasuries last Tuesday, roughly 80 basis points tighter than their widest levels after the Aug. 14 restatement. A comparable issue, the Countrywide Credit 5.625% notes of '07 (A3/A), tightened some 30 basis points over the same period to 169 basis points over Treasuries.
Though both Moody's Investors Service and Standard & Poor's quickly affirmed Household's rating after the restatement, Dave Hendler, analyst at Creditsights, downgraded the credit. He argues that it should not take a forced deadline to get the company to own up to questionable accounting practices. "The certification deadline was a 'gotcha trap' and they fell in. We were relying on them doing it the conservative way because that's how they market themselves. Now we have to wonder about their ongoing loan quality and exposure to predatory lending lawsuits: Are we getting the conservative outlook?" Hendler says he wants to see the company increase its reserve accounts from 112% to 125-150% of non-performing assets.
But, Bill King, analyst at UBS Warburg, argues that the company, which has been subject to selling pressure all year, continues to be undervalued. While he does not expect Household spreads to tighten until the economy improves, he argues that the bonds will eventually trade just 50 basis points back of the Countrywide paper. "In the grand scheme of things [the restatement is] not significant. We're talking about $386 million over seven years, while earnings were $10.5 billion over that time frame," says King.