Investors piled into Advanta Corp.'s bonds in the past week as takeover rumors swirled around the Spring House, Pa.-based credit card issuer.
Analysts noted that spreads on Advanta's shorter-term securities-the difference in yield between Treasuries and the corporate bonds-tightened by about 15 to 20 basis points in the last week.
Investors are becoming more convinced that "something positive is going to happen," said Joseph J. Labriola, who heads PaineWebber's corporate bond research department.
A deal soon could reduce the spread on the Advanta securities by 80 to 100 basis points, he said.
Takeover rumors have grown since $5.5 billion-asset Advanta, one of the nation's largest monoline card issuer banks, hired BT Wolfenson to advise it on strategic alternatives. Wolfenson, owned by Bankers Trust New York Corp., is well know for its merger and acqusisition work.
Potential suitors include National Australia Bank, Chase Manhattan Corp., BankAmerica Corp., and First Chicago NBD Corp.
Advanta brought in Wolfensohn in March after announcing that it would post a first-quarter loss. The news brought several downgrades from ratings agencies and spurred investors to stampede out of the bonds. At that time, spreads on the Advanta's bonds widened as much as 80 basis points.
Analysts noted that Advanta bonds have become increasingly attractive since investor and money manager Michael F. Price of Heine Securities Corp. bought more than 7% of the company in early June. Mr. Price has a reputation as an active shareholder who compels management to raise returns, by selling if necessary.
Mr. Labriola pointed out that the company has improved its fundamentals. Losses and delinquencies have stabilized and financial products have been repriced.
"Advanta is gaining momentum," said Mr. Labriola. "With BT Wolfensohn in the market and Michael Price investing in the company, I expect spreads to continue to tighten throughout the summer."
Meanwhile, bank bond analysts have been recommending more finance company bonds, because they have been trading cheaper than other companies.
Investors have grown wary of such bonds, after unrelenting reports on deteriorating credit quality.
In a recent report, bank bond analyst William R. King of UBS Securities Inc. noted that investors could pick up 4 basis points by investing in Household Finance Corp. bonds, which have been trading cheaper than Household's A2 or A ratings would suggest.
Mr. King acknowledged that chargeoffs and delinquencies are much higher for consumer finance companies.
"What you have to realize is that chargeoffs and delinquencies started from a low point," he said. The most important factor, he said, is not that chargeoffs and delinquencies have gone up, "but where they have gone up from."
Bond analyst Matthew H. Burnell of Merrill Lynch & Co. added that he thinks fear about consumer credit has been somewhat overblown.
Investors should reduce their exposure to unsecured lenders in favor of higher-rated and more diversified companies, he said.