Investors let out a sigh of relief last week following the announcement of the $14.2 billion acquisition of Household International by British bank HSBC Holdings plc. While ABS spreads had yet to react much as of late Thursday, a number of combined factors signal positives for Household ABS holders after weeks of pressure following its settlement on predatory lending activities.
The most obvious positive comes from the higher corporate unsecured rating and more diverse finding base of the new parent. Upon announcement, both Moody's Investors Service and Standard & Poor's. took positive action on Household's single-A unsecured rating. "Upon the close of the transaction, the long-term and short-term credit ratings on Household likely will be raised one notch to A' and A-1', respectively, with a stable outlook," S&P said in its release. Fitch Ratings changed Household's outlook to evolving from negative.
"With the acquisition, Household has effectively reduced its cost of funds and may slow ABS issuance planned for 2003," theorized Barclays Capital researcher Jeff Salmon following Thursday's conference call. Previously, Household had previously estimated $15 billion to $17 billion of securitization activity in 2003. Household announced earlier this year that it would increase its reliance on ABS for funding, following Fitch placing its debt rating on watch for a downgrade, in part for not securitizing enough.
Despite the new parent, Household will remain as a stand-alone entity in the near term. Most see ABS issuance slowing considerably, as Household will now have access to funding sources from which it was previously restricted. The decrease in supply should help further boost spreads over the long term.
Yet to be determined at this early stage is the status of future lead managers of Household ABS. While HSBC has a debt capital markets unit in New York, which underwrites unsecured paper, HSBC is not a player in the ABS underwriter market.
"I don't look for HSBC to all of a sudden develop into like Citibank and begin securitizing all of these assets," one trader said. "HSBC traditionally has funded in the unsecured market and held on to its assets, rather than securitize. But I assume that HSBC will have some capacity in future Household ABS selling groups."
In a unique twist of timing, at the time of the announcement, Household was in the primary market with a $840 million 2002-3 private label credit-card ABS, which had been lingering through the pre-marketing process. By late Thursday, the triple-A rated senior tranche was reportedly two-times oversold and on track for a Friday pricing.
To date, Household has sold $8.5 billion of auto-loan, credit-card and home-equity ABS in 2002, including the aforementioned pending transaction. Based in Prospect Heights, Ill., Household is the second-largest consumer lender in the U.S., behind Citigroup. London-based HSBC is the largest bank in the U.K.