As previously reported (ASR 1/21/02 p. 6), Household Finance has taken the first step in beefing up its reliance on securitization as a funding alternative. Last week's offering of $1 billion of home-equity paper was the first of what is expected to be up to $4.5 billion of real estate supply from Household in 2002.
Following a previously anticipated downgrade to single-A, from single-A-plus, Fitch kept the finance conglomerate's outlook on negative watch, citing HFC's "relatively low levels of real estate securitization." Despite Fitch's concerns, both Moody's Investors Service and Standard & Poor's rate HFC comparably, A2/A, respectively, both with a stable outlook.
Traditionally an issuer of debt securities for funding, HFC announced in an investor conference call that followed the downgrade:
"Against (the current economic) backdrop, Fitch would like us to demonstrate a more active securitization program for real estate secured loans, to demonstrate them as a potential backup source of liquidity in the event of a market disruption which might restrict our ability to borrow."
With only $1.5 billion of ABS issued in 2001, according to Thomson Financial, the company is expected to quadruple its securitization plans from last year to quell the rating agency concerns.
As a result of the relatively high, unsecured ratings of the issuer, its ABS does not need to include tranches rated below single-A. For this offering, led by Morgan Stanley and CSFB, Household offered investors $888 million of triple-A securities and $111 million of double-A paper. Both classes have an average life of 2.24-years.
Collateral backing the deal was very high quality, buyside sources noted, with an average FICO of 629 and loan-to-value ratios up to 110.
While the issuer could have chosen to sell single-A notes with the 2002-1 deal, the company chose instead to retain the single-As, mainly due to the difficult nature of selling single-A-rated paper, which has less of a natural investor base in the ABS market.