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Capital One: What's in Its Wallet?


Capital One is increasing its risk as it is not able to securitize its recievables as it once was and taking on the debt itself.


Capital One's (COF) CEO is saying at a Lehman (LEH) conference that the turmoil in the credit markets is not adversely affecting his business. This is essentially true. But like always, let's ask why.

I explained yesterday that there has been a significant decrease in non-revolving debt (securitized debt like mortgages) and an increase in revolving debt (unsecured credit card debt). This is temporarily good for companies like COF.

COF gets its liquidity from several sources. It securitizes its receivables and sells them. This source is slowing, but right now investors are still buying this higher yielding debt. This will reverse as the credit crunch continues.

Second, it gets it from the fees it charges. This is very good right now as higher quality consumers, even, are having to use credit cards for their liquidity.

Third, COF gets it from the debt it issues privately. These spreads have risen so it does cost it some more to get this.

So COF is currently somewhat benefiting from the fact that other sources of lending, lower margin and higher quality lending, are deteriorating.

Essentially, COF is increasing its risk as it is not able to securitize its recievables as it once was and taking on the debt itself.

This is what the CEO sees as opportunity. Only time will tell.

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Position in COF.
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