Credit analyst doesn't see big gains in Household, but favorable risk

By Ronda Fears

Nashville, Jan. 8 - While there probably are no big gains to come in Household International paper, the risk/reward profile of the credit is favorable, said Kathy Shanley, senior bond analyst at Gimme Credit.

"Yesterday, Household International (A2/A-) joined a wave of issuers eager to capitalize on the sudden burst of investor enthusiasm for the corporate bond sector," Shanley said in a report Wednesday.

"The consumer finance company, awaiting the completion of its merger with HSBC Holdings plc, priced $1.75 billion in new debt in a deal that was nearly three times oversubscribed. Bondholders had some sleepless nights with Household in 2002, but are now betting the excitement is over."

The notes contain a provision providing for a 200 basis point step-up in the coupon in the event the HSBC merger fails to close by March 31.

Shanley said that by all accounts the merger is proceeding according to plan, but it makes sense for Household to hedge its bets and front-load its 2003 financing requirements.

The proposed merger was announced in November and the merger filing, made public last month, "makes clear that a major motivation for the deal was to relieve the company of the burden of financing itself exclusively in the global capital markets."

HSBC has not committed to directly guarantee or support Household's debt obligations, but Shanley expects Household to benefit from the implied support of its stronger parent. And Household is suggesting its funding needs may decrease somewhat post-merger, as it may be possible to transfer some assets to the parent.

"For bondholders, the immediate risk in buying this week's new issue is the small chance the merger might fall through at the last minute," Shanley said.

"We can't entirely rule out the risk of a negative surprise, but we're not aware of current issues that would threaten the deal."

It was sensible for Household to pre-fund as much of its 2003 needs as practical, she said, and it shows that the company is focused on maintaining its independent liquidity position.

Moreover, even as a standalone holding, Household is relatively good. Credit quality in the sub-prime sector is still a concern, but she said fundamentals industrywide haven't deteriorated materially since November.

"We don't see big gains ahead for Household paper comparable to the rally on the initial merger announcement, but still see a favorable risk/reward tradeoff with this credit," Shanley said.

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