425 1 finalreviewandoutlook.txt DECEMBER 18, 2002 - FORM 425 (PRESENTATION) Filed by Household International, Inc. Pursuant to Rule 425 under the Securities Act of 1933 and deemed filed pursuant to Rule 14a-12 under the Securities Exchange Act of 1934 Subject Company: Household International, Inc. Commission File No. 001-8198 On December 18, 2002, Household International, Inc. held a meeting with institutional bankers and analysts. A copy of the slides shown at the meeting follows. HOUSEHOLD [LOGO] FIXED INCOME REVIEW AND OUTLOOK DECEMBER 18, 2002 This presentation, including the accompanying slides, contains certain forward-looking information which is subject to risk and uncertainties and speaks only as of the date on which it is made. Please further be advised that Regulation FD prohibits Household representatives from answering certain, specific questions during the Q&A session. AGENDA ============================================================================ o 2002 FUNDING REVIEW o Merger with HSBC o Economic and Financial Outlook o Capital o 2003 Funding Outlook 3 2002 CHALLENGES ============================================================================ o Efficiently issue increased volume in difficult markets o Decrease disparity between U.S. and European credit spreads for HFC - Improve European credit research - Non-deal roadshows to build investor awareness and knowledge - Extend trading survey to Euro bonds o Increase European participation in HFC offerings - Use larger selling groups with retention bonds to retail banks - Consider reverse inquiry and structured EMTNs - Consider smaller, more frequent Euro and other Foreign currency offerings o Build a wider following among Tier II accounts - Offer Tier II accounts protection for pot orders o Expand distribution in the retail sector o Repair any reputational damage caused by recent press 4 2002 HIGHLIGHTS ============================================================================ o $5.7 billion in retail MTNs as of November 30th o (EURO) 3.0 billion in 3 tranches o (POUND)500 million 10-year o Inaugural 30-year bond offering o Continued to extend maturity profile o Demonstrated liquidity of real estate portfolio through securitizations and asset sales 5 2002 FUNDING REVIEW ============================================================================ o Institutional unsecured issuance through December 15th for domestic operations totaled $15.1 billion - $6.3 billion U.S. dollar fixed rate Globals - $2.7 billion EURO denominated transactions - $1.2 billion other foreign currencies - $4.9 billion domestic MTNs o Issuance in excess of plan due to: - Significant reduction of the commercial paper balance - Credit card bank consolidation o Other notable financing transactions - Twelve public securitizations totaling approximately $11.2 billion - $5.7 billion retail MTNs - $750 million retail preferred stock - Bought back over $1billion of various HFC, HBNV and HBfsb issues 6 ACCESS TO NUMEROUS INVESTOR BASES ============================================================================ [pie chart] Foreign (Non-Euro) 6 percent USD Globals 30 percent Retail (Internotes) 28 percent MTNs - Non-Dealer 15 percent Euro Globals / Euro MTNs 13 percent MTNs - Dealer 8 percent *AS OF DECEMBER 15, 2002 7 MATURITY PROFILE OF 2002 ISSUANCE ============================================================================ [two pie charts, side-by-side] To Maturity 2003 15 percent 2004-06 20 percent 2007-11 23 percent 2012 23 percent 2017+ 19 percent To Call 2003 15 percent 2004-06 33 percent 2007-11 29 percent 2012 16 percent 2017+ 17 percent 65 percent 5 years or greater 52 percent 8 2002 UNDERWRITTEN DEBT ALLOCATION BY REGION =============================================================================== [pie chart] UK 17.8 percent Benelux 5.9 percent Germany 5.3 percent Italy 4.2 percent Asia 3.6 percent France 3.4 percent Iberia 3.3 percent Scandinavia 2.2 percent Switzerland 2.0 percent Middle East 0.8 percent Austria 0.5 percent Other 0.3 percent US 50.7 percent 9 2002 UNDERWRITTEN DEBT ALLOCATION BY INVESTOR TYPE ================================================================================ [pie chart] Insurance 19 percent Bank 19 percent Pension 6 percent Central Bank 2 percent Corporation, Endowment, Government, Trust Fund 1 percent Private Bank 1 percent Retail 1 percent Asset Manager 51 percent 10 2002 DIVERSIFICATION OF INVESTOR BASE ============================================================================== o 323 first time buyers of HFC paper - 207 HFC U.S. Dollar Globals - 116 Euro denominated bonds o 258 or 80% of new buyers are domiciled outside the U.S. o 640 different buyers of underwritten debt o Approximately 190,000 retail MTN buyers 11 GLOBAL BOND ORDER SIZE COMPARISON 2000 - 2002 ============================================================================== [bar graph] Percent of dollar Volume 2000 percent of dollar 2001 percent of dollar 2002 percent of dollar in millions Volume Volume Volume Less than $5MM 6.5 7.5 6.5 $5.0-$9.9MM 11.5 14.0 12.0 $10.0-$24.9MM 27.5 34.0 39.5 $25.0-$49.9MM 27.0 28.50 24.5 More than $50MM 27.0 18.5 20.0
12 HOUSEHOLD'S POSITION IN THE INDICES ==============================================================================
2002 2001 RANK PERCENTAGE RANK PERCENTAGE ---- ---------- ---- ---------- Merrill Lynch Corporate Master 7 1.67% 8 1.47% Finance 5 6.05% 5 6.22% Salomon SSB BIG Index 9 1.44% 8 1.33% Finance 4 4.80% 4 4.92% Lehman U.S. Credit 9 1.40% 7 1.40%
13 FIXED INCOME FEES PAID BY U.S. OPERATIONS ============================================================================ [pie chart] MTNs 2 percent Retail MTNs (1) 18 percent $ Global 18 percent ABS 15 percent Derivatives 10 percent Convertible 10 percent Preferred Stock (1) 10 percent Misc Liquidity 8 percent Euro Bonds 5 percent Other/FX 4 percent TOTAL FEES $161 MILLION (1) ESTIMATED NET FEES RETAINED BY INVESTMENT BANK 14 AGENDA ============================================================================ o 2002 Funding Review o MERGER WITH HSBC o Economic and Financial Outlook o Capital o 2003 Funding Outlook 15 MERGER TRANSACTION OVERVIEW ============================================================================ Fixed Exchange Ratio: 2.675 HSBC shares or 0.535 ADRs for each Household share Structure: Tax-free stock-for-stock exchange Total Equity Value: US$14.2 billion Expected Earnings Impact: Accretive to 2003 EPS Expected Close: First quarter 2003 Required Approvals: Regulatory Household and HSBC shareholders 16 STRATEGIC RATIONALE ============================================================================ o Bringing together one of the world's top asset generators with one of the world's top deposit gatherers o Significant geographic and business line diversification o Stable and lower cost funding for Household with enhanced market access o Meaningful opportunities to broaden the product range available to both retail and commercial customers o International roll-out of Household's business model o Leveraging Household's strong marketing, credit management and technology skills 17 SYNERGIES ============================================================================ o Creating a Financial Services Franchise Balanced between North America, Europe and Asia CRITERIA KEY POINTS ----------------------------- ---------------------------------------- Strategic Fit ----> Consumer focused asset generator Human Fit ----> Shared vision for the future Technology Fit ----> Complementary platforms and approach Ease of Integration ----> Management continuity and branding to be preserved EPS Accretion ----> Yes and risk adjusted value enhancing Manageable Risk ----> Careful consideration of business model and controls 18 MERGER UPDATE ============================================================================== o AG Settlement - 50 states and the District of Columbia - Complaints filed - All consent decrees expected within one week o Regulatory Filings - FTC (Hart-Scott-Rodino) - OCC - New York Banking Commission - State insurance and banking commissioners (where applicable) - FSA 19 OTHER HEADLINE ITEMS ============================================================================ o Thrift sale o Transfer of Household Bank fsb securities o H&R Block o Other civil litigation 20 RATING AGENCY UPDATE ============================================================================ HFC - CURRENT RATING -------------------- MOODY'S A2 / P-1 On review for possible upgrade S&P A- / A-2 Upon the close of the transaction, ratings will Positive Outlook likely increase one notch to A (Stable) / A-1 FITCH A / F-1 Revised the ratings watch to Evolving from Negative 21 AGENDA ============================================================================ o 2002 Funding Review o Merger with HSBC o ECONOMIC AND FINANCIAL OUTLOOK o Capital o 2003 Funding Outlook 22 2003 ECONOMIC OUTLOOK ============================================================================ o Cautious view on economic growth and credit quality - 70% chance of sluggish recovery - 30% likelihood of a "double dip" o Forecast assumptions: LIKELY DOUBLE DIP ------- ---------- - GDP 3.1% 1.3% - Unemployment 6.1% 6.8% - CPI 2.2% 1.7% - Fed gradually tightens starting in 3Q of 2003 23 FOUNDATION FOR 2003 OPERATING PLAN ============================================================================ o Receivables growth excluding potential loan sales of approximately 8% o Net interest margin trending back toward longer term average of 8% o Charge-offs stable with some possibility of increase o Continue to build reserves 24 DIVERSIFIED AND INCREASINGLY SECURED RECEIVABLES MIX ============================================================================ [two pie charts, side-by-side] 1997 ---- First Mortgage-Correspondent 3 percent First Mortgage-Branch 17 percent Second Mortgages 11 percent PHL 2 percent Other Unsecured 12 percent MasterCard/Visa 29 percent Private Label 14 percent Auto 1 percent International 11 percent $61.8 BILLION(1) 3Q 2002 ------- First Mortgage-Correspondent 15 percent First Mortgage-Branch 22 percent Second Mortgages 7 percent PHL 5 percent Other Unsecured 11 percent MasterCard/Visa 15 percent Private Label 11 percent Auto 7 percent International 7 percent $107.1 BILLION (2) (1) EXCLUDES COMMERCIAL, OTHER RECEIVABLES AND RECEIVABLES FROM BENEFICIAL'S DISPOSED CANADIAN AND GERMAN OPERATIONS. (2) EXCLUDES COMMERCIAL AND OTHER RECEIVABLES. 25 AGENDA ============================================================================ o 2002 Funding Review o Merger with HSBC o Economic and Financial Outlook o CAPITAL o 2003 Funding Outlook 26 CAPITAL ============================================================================ o Stock buybacks were halted o On track to continue building TETMA ratio o Continued focus on combination of capital and reserves in 2003 o Final capital position dependent on preferred stock redemptions, views of new parent, and comfort of other constituents (rating agencies/investors) 27 CAPITAL RATIOS ============================================================================ [line graph] RATIOS DEC-99 DEC-00 DEC-01 SEP-02 DEC-02 EST TETMA + Owned Reserves 9.02 9.35 10.03 10.52 11.75-12.00 Tangible Equity-to-Tangible Managed Assets 6.76 7.13 7.57 7.95 9.00-9.25 Tangible Common-to-Tangible Managed Assets 6.06 6.24 6.24 6.16 6.75-7.00 FAS 133 IMPLEMENTED 1/1/01
28 HOUSEHOLD CONSOLIDATED STRESS TEST (PRETAX) ============================================================================ [bar graph; values are in percentages] Pre-tax Pre Credit- Pre-tax Net Cost Return on Return Pre-tax Managed Owned Loss Average on Managed Household Household's Assets + Reserve - Chargeoffs(1) = Assets + Capital(2) = Capital Cushion 1x Chargeoffs 7.4 2.7 -3.5 6.6 12.9 19.5 2x Chargeoffs -6.9 3.2 16.1 3x Chargeoffs -10.4 -0.3 12.6
NOTE: EXPRESSED AS A PERCENT TO AVERAGE MANAGED ASSETS (1) 3-Year average chargeoffs (2) Includes October 2002 issuance of $400 million of common equity and $500 million of mandatory convertible debt FAS 133 IMPLEMENTED 1/1/01 29 LIQUIDITY MANAGEMENT ============================================================================ o Liquidity management will continue to be Treasury's primary focus o Manage CP outstandings to ensure 100% backstop coverage - $10.1 billion committed lines in place with maturities ranging from 2002-2005 - $5.6 billion term facilities - $4.5 billion 364 day facilities - High quality bank group with - No MAC clauses 68% rated Aa3 or better o Will review appropriate amount of backstops relative to smaller ongoing commercial paper issuance o Standard analyses are utilized to measure liquidity risk - Limit concentration of debt maturity - Maximum Cumulative Outflow (MCO) analyze both asset and liability runoff to manage funding risk o Contingency funding plans are prepared quarterly forecasting worst case scenarios o Efforts continue to diversify funding through product offerings, broadening investor base and expanding geographic distribution 30 LIQUIDITY RISK MANAGEMENT ============================================================================ HAVE NET CASH INFLOW FOR NEXT 5 YEARS Assumptions: |X| No asset growth |X| Contractual runoff of all unsecured debt |X| Asset runoff is based on historical experience
Largest Cumulative Monthly Outflow (Inflow) Outflow ----------------------------------------------------------------- Yr. 1 Yr. 2 Yr. 3 Yr. 4 YR. 5 ----------------------------------------------------------------- 12/31/99 10.7% 8.1% 7.7% 5.6% 4.6% 2.1% 12/31/00 9.0% 5.0% 7.5% 5.6% 0.9% (0.9%) 12/31/01 7.0% 3.0% 1.1% (3.2%) (4.9%) (8.7%) 09/30/02 2.0% (2.2%) (3.0%) (8.4%) (13.6%) (16.7%) Net Cash Outflow (Inflow) $2.1 ($2.3) ($3.2) ($9.1) ($14.7) ($18.0)
31 AGENDA ============================================================================ o 2002 Funding Review o Merger with HSBC o Economic and Financial Outlook o Capital o 2003 FUNDING OUTLOOK 32 DIVERSIFIED FUNDING MIX =============================================================================== ($ MILLIONS) CP and Other Short-Term Borrowings (1) $5,381 5% Deposits 4,393 4 Euro and Other Currencies 11,705 11 USD Senior Debt 45,336 44 Retail MTNs 6,491 6 Real Estate Financing (2) 7,718 8 Asset-Backed Securities 23,111 22 -------- ----- Total $104,135 100% ======== ===== AT NOVEMBER 31, 2002 (DOMESTIC ONLY) (1) Commercial paper net of investments $1,972 million. (2) Real estate that has been securitized but is accounted for as debt. 33 2003 FUNDING OBJECTIVES ============================================================================ o Adjust ratings to reflect financial strength of new parent - Reconnect with A1/P1 CP investor base o Continue to broaden global investor base - Non-Japan Asia and European retail - Further inroads internationally o Use dealers who provide: - Consistent, high-quality research - Secondary market support - Place paper with desired investor base o Communication - Describe the "new" HFC to investors - Coordinate funding needs and objectives with new parent's issuance 34 2003 FUNDING NEEDS =============================================================================== o View to front load funding due to market and geo-political uncertainties o Magnitude of issuance (unsecured and/or ABS) may decrease depending on ability to originate/transfer assets to HSBC o Currently, we believe total senior debt needs are $12-14 billion - Retail MTNs (domestic and Euro) of $5-7 billion - Dollar global issuance of $4-6 billion - Institutional MTNs (3 years or less) of $1-2 billion - Foreign currency offerings of $1-2 billion o Public securitizations of $13-15 billion across all product classes o Asset sales $5-7 billion o Create single seller ABS CP program of $3-4 billion o UK and Canadian needs are minimal - exact amounts yet to be determined 35 Investors and security holders are advised to read the prospectus regarding the business combination transaction between HSBC and Household referenced in these presentation materials, when it becomes available, because it will contain important information. The HSBC prospectus will also constitute the Household proxy statement and will be filed with the Securities and Exchange Commission by both companies. Household stockholders may obtain a free copy of the proxy statement/prospectus (when available) and other related documents filed by either company at the Commission's website at www.sec.gov. When available, the proxy statement/prospectus and the other documents may also be obtained from HSBC by contacting HSBC, Attention: Ted Ayvas, Tel: (212) 525 6191 and/or Household by contacting Household, Attention: Craig Streem, Tel: (847) 564 6055. HSBC and Household and their respective directors, executive officers and certain other members of management and employees may be soliciting proxies from Household stockholders in favor of the acquisition. Information concerning the participants will be set forth in the proxy statement/prospectus when it is filed with the Securities Exchange Commission. 36