Analysts on the buy- and sell-side are generally uneasy regarding the weakening economy's effect on non-depository financial companies, and while they are not betting on further spread widening, only Household Finance is being touted as a clear weakness play. Van Hesser, analyst at Credit Suisse First Boston, says bonds of Household Finance were cheap at last Monday's levels. The 6.75% notes of '11 (A2/A+) were bid at 172 basis points above comparable Treasuries, and 15-30 basis points behind big banks such as Bank of America, First Union, and U.S. Bancorp. He says Household bonds could close that gap by 10 basis points over the next three to six months. He says Household's spread levels reflect concerns of rising unemployment, but that the company's strong track record makes it a buy. A buy-side analyst at a large West Coast firm believes the bonds are fairly valued, however, arguing that 15-30 basis points is an appropriate discount in a weak economy for a financial name without depository assets.
Hesser is less bullish on GATX Financial, the only major aircraft leasing company not protected by a large, deep-pocketed parent. The company, which also leases railway equipment, saw its 7.75% notes of '06 (Baa2/BBB+) trade at 85 last Monday. He says that there may be near-term weakness in the name if the company, which was on review for downgrade from both major ratings agencies, actually receives downgrades, but he believes the notes are a buy longer term. Near-term investors should pick up the bonds if they drop to the 70's, he says. The buy-sider says his firm is not particularly happy about owning the bonds, but would nonetheless buy more if they dropped to the 70s.
Some investors, however, are not taking any chances on the sector. One east coast buyside analyst says her firm had limited its exposure prior to Sept. 11, and does not see recent spread widening as an opportunity to change course. She says most non-depository financials pose too great a risk in the current environment, given the absence of consumer deposits and Federal Deposit Insurance Corporation oversight.
While Household may be an exception, the firm has market-weighted the name, and, given its underweight in other non-depository financials, that amounts to an overweight in practical terms, she says.