Differing views on Wells Fargo

Fitch Ratings placed the ratings of nine US banking companies and their subsidiaries, including Wells Fargo & Co. (AA/F1+), on Rating Watch Negative, on Friday. The action reflects Fitch's view that these institutions show an incrementally higher level of vulnerability to the credit deterioration, which Fitch expects to continue across virtually all loan categories.

This is anticipated to place additional stress on earnings, as provision requirements are likely to remain elevated over the intermediate term. With that said, Fitch expects that the majority of the downgrades will be limited to one notch, although certain hybrid capital instruments could see additional notching.

However, following the raising of US$8.6 billion of common equity, Moody's raised its bank financial strength rating (BFSR) on Wells Fargo Bank (and subsidiary, Wachovia Bank) to 'C-' from 'D+' and left a developing outlook on the rating. The developing rating outlook reflects the sensitivity of the rating to Wells Fargo's capital trends.

Further improvement in Wells Fargo's capital ratios would put upward pressure on the ratings. Conversely, negative pressures would exist if Wells Fargo's credit costs were larger than Moody's expectations or management took steps that resulted in increasing leverage such as repaying its $25 billion in TARP preferred stock without taking compensating actions.

Similarly, based on capital raising initiatives by Bank of America Corp, Moody's has placed its 'D' BSFR rating on BAC's banking subsidiaries on review for possible upgrade. The initiatives, if successful, should strengthen BAC's capital position without impairing BAC's franchise or future earnings power. BAC's capital raising initiatives are being undertaken in response to the US stress tests. Moody's will focus on the likelihood that BAC will succeed in its efforts during the review.   

As of today, holders of SLM Corp's $600 million May 2009 bonds should receive their final coupon payment and the return of their principal. However, there still remains $1.0 billion of bonds on issue with maturities ranging from December 2010 to May 2012. Moody's has resolved the review for possible downgrade initiated in late February and lowered the long- and short-term ratings on the company to 'Ba1/NP' from 'Baa2/P-2'.

Moody's said the downgrade reflects concerns regarding SLM's earnings and cash flow generation capacity, and continued uncertainties facing the company related to the political and consumer lending environment and its liquidity and funding position. This combination of circumstances is not consistent with an investment grade ratings profile, in Moody's view.

Following on from its downgrade of Assured Guaranty Corp. the week before last, Fitch moved on Financial Security Assurance Inc., (FSA) last week, lowering its insurer financial strength rating to 'AA+' from 'AAA'. The rating had been on Rating Watch Negative since October and remains so.

The acquisition of FSA by Assured has yet to be completed and as part of the transaction FSA's parent, Dexia, will retain most of FSA's financial products business. To protect FSA/Assured from the credit and liquidity risks associated with this business Dexia will provide various liquidity lines, guarantees and collateral posting mechanisms. Some of these obligations will in turn be guaranteed by the governments of Belgium and France.

Fitch expects to resolve the Rating Watch status for both FSA and Assured once the transaction has closed and there is greater clarity with respect to the combined company's business strategy and capital management plans, as well as developments in the markets for financial guaranty insurance. In the case of FSA, if Fitch were to downgrade the company, the IFS rating would be unlikely to fall below 'AA'.

In a bulletin released following the release of Assured's first-quarter results, Moody's noted that Assured had announced that it has received all the required regulatory approvals for the pending acquisition of FSA and that it expects to complete the transaction during the second quarter of 2009. Based on feedback from Assured, Moody's understands that the acquisition is proceeding according to plan, including the introduction of contractual arrangements which are expected to effectively insulate Assured from consequential risk of FSA's asset management platform, including the GIC and Global Funding businesses.

As a result of its rating action on FSA, Fitch lowered its rating on $659 million of FSA wrapped bonds issued by Sydney Airport Finance Company to 'AA+' and left the rating on Rating Watch Negative.