Fixed-income investors are questioning whether Providian Financial's bonds are worth buying, and wonder if the new ceo, Joseph Saunders, can keep the company afloat long enough to make the remaining 31/2 months of interest and principal payments on its 6.75% notes of '02. There were no bids on the notes last week, according to one high-yield trader, who reasons that the low 80s would be an appropriate price for the bonds, given that Providian's 6.70% notes of '03 are bid at 78. This trader continues that the last trade he saw in these bonds was nearly a month ago, which was at 80. Those levels caused an East Coast buy-side analyst to wonder whether the bonds might be worth a gamble. He reasons that Saunders, a credit-card industry veteran, presumably did his due diligence prior to joining the company. Still, the analyst believes it is not worth the risk. Of Providian's bonds, he says, "I didn't own them on the way down, and I'm not going to step in at this point."
But the troubled financial straits of the company make a short-term bet daunting, according to David Hendler, an analyst at Creditsights, an independent fixed-income research firm. He notes that in the 1980s, investors made similar bets on Texas banks MCorp and First Republic, and came up empty. Hendler argues that there are still major questions about the health of Providian's receivables portfolio. He also worries that the company's plan to borrow money from less sophisticated retail investors using certificates of deposit, and other short-term instruments using Federal Deposit Insurance Corporation insurance as collateral, may run afoul of regulators. "I am not going to recommend these bonds as a [31/2] month bet," says Hendler. "It may work out, but there are too many unknowns for you to sleep at night."