A prominent bank bond analyst has picked up coverage of the major consumer finance companies, saying the meltdown among subprime specialists has created investment opportunities in the sector.
Allerton G. Smith, of Donaldson, Lufkin & Jenrette, has added coverage of 10 high-grade finance firms this year, including Associates Corporation of North America, Household Finance Corp., AT&T Capital Corp., Transamerica Corp. and American General Finance.
Mr. Smith said these companies have generally improved their business operations. He is particularly bullish about Associates and Household, noting that they have built up their clout through acquisitions.
And he said the meltdown in the securitization market has spurred many high-grade companies to focus on issuing debt.
A strong economy and deep capital markets have encouraged several large bank bond issues that have drawn more investors than investment bankers anticipated. Investors are likely to be attracted to the finance companies' debt as well, Mr. Smith believes. Indeed, investors snapped up a $1.3 billion issue by Household Jan. 29.
"The retreat of subprime companies has improved the margins of many high-grade finance companies and lowered competitive forces. There is also a more disciplined focus for these companies, which have created economies of scale and cost savings because of well-executed and strategic acquisitions."
Mr. Smith acknowledged that Associates' recent $3.9 billion acquisition of Avco Financial Services could bring risks.
That acquisition-Associates' largest-raised eyebrows at Moody's Investors Service. On Nov. 10, Moody's confirmed Associates' senior rating, but changed the outlook of the company to negative because of the goodwill and leverage the acquisition would bring. Standard & Poor's maintained its ratings.
But Mr. Smith argued that the deal makes sense. Avco "diversifies Associates' products and services, reduces costs through scale economies, and extends its position in consumer finance and home equity lending," he said.
Mr. Smith said there is no question that a broad economic slowdown in the United States would hurt Associates, as it would all finance companies. But he noted that the company enjoys internal growth fueled by new products, such as home equity lending in Texas.
Likewise, Household's acquisition of Beneficial Corp., which closed recently, has made its bonds more attractive despite the integration risks, Mr. Smith said. He said the deal has strengthened Household's presence in the United Kingdom, improved its operating efficiencies and diversified its earnings stream.
Mr. Smith said the deal has helped Household to shift from unsecured to secured lending. He noted that home equity loans accounted for 34.9% of the company's portfolio at yearend, up from 31% at yearend 1997.
