Capital One Financial Corp., the nation's seventh-largest credit card company, got a boost this week when its bonds were given an investment- grade rating by Moody's Investors Service.
Moody's on Tuesday upgraded Capital One's senior debt to Baa3, from Ba1, citing the company's improved financials and diversified funding sources. The upgrade will affect $3.4 billion of debt securities.
"The company has demonstrated stronger financial performance and good application of strategy," said Steve Nelson, vice president and senior analyst at Moody's. "The results have been good, solid growth and performance."
It is expected that the higher rating will enable Falls Church, Va.- based Capital One to raise funds more cheaply at the holding company level. Moody's also boosted what were already investment-grade ratings on Capital One's two subsidiaries, Capital One Bank and Capital One FSB. Ratings on their senior debt were lifted to Baa2, from Baa3, and deposits were raised to Baa1, from Baa2.
The advantage to the holding company of having an investment-grade rating is that it has fewer regulatory restrictions on how it can use borrowed money than if it were raised by the company's banks and thrift subsidiaries.
Standard & Poor's, the other major rating agency, still grades Capital One's long-term debt as junk, at BB-plus.
"Now they have one foot in investment grade and one foot on the other side of the threshold," said Eric Grubelich, an analyst at Keefe, Bruyette & Woods Inc. in New York.
The change in bond ratings immediately led to a price increase for its corporate bonds, reducing the yield needed to attract investors. Since the announcement, the bids on the spread between Capital One seven-year bonds and comparable U.S. Treasury securities narrowed to 195 basis points, from 225, according to an analyst.
In explaining its move, Moody's cited Capital One's improved financials. Asset quality has strengthened, with chargeoffs at 3.93% of managed loans as of March 31, down from 6.04% a year earlier. Loan growth was up 23% at that time, to $17.4 billion. Capital One also boosted its deposit base over the last year, to $2.2 billion from $1.1 billion.
Moody's also said Capital One is offering more products and that its strategy of mining customer data has translated into profits.
Still, the rosy picture for Capital One was not enough to sway Standard & Poor's just yet.
Tanya Azarchs, an S&P analyst, said that, though the company's numbers look strong, overall prospects for the credit card industry cast a large shadow. If a modest recession took hold, chargeoffs across the industry would "climb into uncharted territory," according to a Standard & Poor's report.
Though Capital One has been improving, "the industry has not been," Ms. Azarchs said. "On balance, we are staying put."
Other analysts are a little more bullish on ratings for Capital One. "They consistently have been very profitable," said Marc Girolamo, an analyst at Deutsche Bank Securities in New York. "Asset quality has been under control. It made holding them below investment grade an old story."