Bond investors are growing wary of rising credit card delinquencies.
The gap, or spread, between Treasury yields and the yields on the bonds of card specialists widened this week on news of a projected $20 million first-quarter loss at Advanta Corp., a card specialist in Spring House, Pa.
The wider spreads, which represent an increase in the cost of raising money for the specialists in credit cards, have not affected more diversified banks that issue credit cards. But analysts say Advanta's announcement seemed to put investors on alert.
"Investors are leery regarding the delinquencies of credit banks, and they will be watching them closely," said Michael Buchanan of Conseco Capital Management, who helps manage $30 billion in bonds. "There will probably be more sellers over the near term."
The spread on Advanta's bonds widened by as much as 80 basis points as the issues were downgraded by several major rating agencies.
Spreads on Capital One Financial, of Richmond, Va., widened by 10 basis points, and spreads on MBNA Corp., Wilmington, Del. widened by 5 basis points.
At the same time, spreads on bonds issued by Columbus, Ohio-based Banc One-which is about to acquire the Dallas credit card specialist First USA Inc.-widened only a basis point or two.
The spreads have since narrowed somewhat, but traders say that bond investors are still wary, so the bonds must carry a higher yield to attract buyers.
Mr. Buchanan noted a similar reaction in the subprime auto sector after Mercury Finance Co. fell on hard times recently. "It's guilt by association," he said.
Analysts said that investors were too quick on the draw when they indiscriminately dumped the bonds of credit card specialists.
MBNA, for example, has been less aggressive in its solicitations and more discerning about its customers than Advanta, analysts said.
Capital One, they said, is similar to Advanta in that its credit losses have risen sharply for several quarters.
The loss rate at the fast-growing spinoff of Signet Bank Corp. soared to 5.11% of average managed receivables in the fourth quarter of 1996 from 2.58% a year earlier.
But that loss rate is better than the median rate of 5.22% for the 18 largest issuers. And analysts note that Capital One has been more disciplined than Advanta in pricing risk.
"Advanta was underpricing its products whereas Capital One has compensated with late fees, over-the-line fees, and other fees and higher yields," said Stanley August, a bank bond analyst at NationsBanc Capital Markets Inc.
"I would say that the jury is still out on Capital One and I'm not sure if its strategy will ultimately prevail, but there is nothing about that company that says it is the next Advanta," added bank analyst Robert Cook of Conseco Capital Management.
Bank analyst Todd Isom of Duff & Phelps Credit Rating Co. agreed that investors may have been a bit too hasty.
"Capital One has gone to a less creditworthy customer, but its yields are higher and its spreads are still attractive," said Mr. Isom. "Everything has gotten hammered, but I'm sure Capital One's spreads will come back in. It has a different story."
