The bonds of Household International are well oversold, according to sell- and buy-side analysts, but the same three researchers are split on Capital One's bonds, with the buy-siders recommending their portfolio managers steer clear of the credit, as it is too risky. Van Hesser, high-grade analyst at Credit Suisse First Boston, believes fears of slower-than-expected GDP growth have caused spreads to widen on Household and Capital One. However, he argues that they are cheap despite the 2-3% growth scenario forecast by CSFB economists.
Household's 7% notes of '12 priced 183 basis points over Treasuries in May, and that gap had widened to 212 basis points by last Monday. That was over 100 basis points wide of large, liquid banks and 50-60 basis points wide of comparably rated brokers, according to Hesser. "There is no good reason why there should be a material difference between Household and where the brokers trade," says Hesser. He believes that because Household is a more frequent issuer than the brokers, it has created unwarranted pressure on the name.
As for Capital One, its 6.875% notes of '06 had widened to 310 basis points over Treasuries last Monday. Hesser believes they should trade at 225 basis points over Treasuries, where they were on June 10. "That's still a lot of yield for a very solid fundamental story," he says.
But, one buy-side analyst at a New York-based firm has concerns about Capital One because its loans are not secured. A California-based buy-side analyst argues that many companies that have grown as quickly as Capital One have blown up.