Myriad rating actions in busy week

In the week that was, rating actions were myriad. Starting with Lehman Bros, Standard & Poor's and Fitch Ratings both moved the ratings on the holding company to default after the company applied for Chapter 11 protection. S&P moved the senior ratings on most subsidiaries to BB- and left them on CreditWatch Developing. Rating moves made by Fitch varied by subsidiary.

Moody's Investor Services took a different approach, moving its senior ratings on the holding company to B3 and on the subsidiaries to B1, with all ratings left on review for further possible downgrade. Moody's did not move to default on the holding company, taking the view that regulators will want to achieve an orderly unwinding of the company that should support asset values for senior creditors.

The acquisition of Merrill Lynch by Bank of America resulted in the A/A2/A+ ratings assigned to the former by S&P, Moody's and Fitch, being placed on review. Fitch and S&P are both unsure whether the development is positive for Merrill's credit quality but Moody's is reviewing its rating for a potential upgrade.

Fitch was the only agency to affirm the senior A+ and AA- ratings that it assigns to Bank of America Corp., the holding company, and the bank, respectively. Moody's has its Aa2 senior rating on review for possible downgrade and S&P immediately lowered its senior 'AA' rating to 'AA-'  and left it on review for further downgrade. S&P talked of the risks of the acquisition in the current turbulent market environment and noted that it comes very soon after the acquisition of Countrywide Financial Corp.  

It was not so long ago that AIG was a 'AAA' rated company but on Monday all three rating agencies implemented the next round of rating downgrades that would trigger the demise of the company and the rescue implemented by the US Federal Reserve. On combined concerns over AIG's reduced flexibility to meet additional collateral needs and increasing residential mortgage related losses S&P, Moody's and Fitch cut their senior ratings for the group to A+/ A2/A from AA+/ Aa3/AA-.

The ratings were initially left on review for further possible downgrade but subsequently amended to evolving or developing after the rescue by the Fed. Fitch noted the highly dynamic nature of AIG's current situation when it changed its Rating Watch to evolving.

HBOS found itself in a similar position to AIG when rating actions by Fitch and S&P led to the market questioning its ability to continue to function as a stand alone entity. This ultimately forced a hastily arranged union with Lloyds TSB. Fitch moved its long-term issuer default rating on the group to 'AA' from 'AA+' and changed the outlook to negative, citing heightened concerns over the outlook for the bank's mortgage portfolio (it is the UK's largest residential mortgage lender) and other property related exposures as the UK economy and property markets weaken, combined with weaker operational flexibility due to dysfunction in parts of the wholesale funding markets, on which the bank is particularly reliant.

Similarly, S&P lowered its long-term credit ratings on the group to 'AA-' from 'AA'.

Subsequent to the announcement of the bank being acquired by Lloyds TSB, S&P placed its credit ratings on HBOS on CreditWatch Developing and placed the 'AA' long-term rating assigned to Lloyds TSB on CreditWatch Negative. S&P observed that although the acquisition was highly attractive in terms of market position, it would lead to increased financial risks in the short to medium term.

Barclays also came under the scrutiny of S&P and Fitch. S&P placed the 'AA' long-term rating assigned to the group on CreditWatch Negative after Barclays announced it would be acquiring Lehman Bros' North American investment banking and capital markets operations for up to US$250 million and associated operational infrastructure for an additional US$1.5 billion.

S&P said the action reflects its view that while the transaction fits in with Barclays' strategy and is at an attractive price, the deal increases potential earnings volatility at a time when its ratings on Barclays were already pressured by a difficult operating environment, both in global capital markets and in the UK. Fitch affirmed its issuer default rating of 'AA' but changed the outlook to negative.

In local rating actions during the week, outlook changes by S&P and Moody's on their ratings for Macquarie Bank provided the short sellers with the ammunition they needed to nearly ensure that it went the way of AIG and HBOS. S&P revised the outlook on the bank's long-term 'A' rating to negative, noting a potential weakening in the bank's operating and financial flexibility due to heightened dislocation of the global financial markets in recent days, and weakening investor sentiment.

Moody's changed the outlook on the bank's 'A1' rating to stable from positive, saying it would continue to monitor market developments closely, particularly the potential for declines in market confidence to impact the bank's fundamental business operations.

S&P lowered its long-term credit rating on Babcock & Brown International Pty Ltd., to 'BB' from 'BB+' on the potential weakening in operational and financial flexibility, driven by the continued fall in the share price of the listed parent company, Babcock & Brown Ltd. S&P also affirmed its 'A+/A-1' ratings on Suncorp-Metway but revised the outlook to stable from positive. S&P stated that the continuing and worse than expected financial market distress had reduced the chances that Suncorp's earnings profile would rebound materially enough in the short term for a rating upgrade to be considered.

Moody's affirmed the Baa2 rating assigned to Envestra Ltd., but amended the rating outlook to negative on Envestra's weakened position within the rating category. Moody's is also concerned about the announced cuts to capital expenditure.

Bemax Resources Ltd. was downgraded by Moody's to 'B2' from 'Ba3', concluding a review of the rating commenced in May after the announcement of a takeover offer from Cristal Australia Pty Ltd. Moody's said the rating downgrade is the result of concerns over the company's ability to maintain production and revenue levels as previously forecast, coupled with limited visibility into the company's ongoing financial and business profile following the recent change in ownership.

And in a bit of positive news, Fitch removed the 'BBB+' issuer default rating for BlueScope Steel from Rating Watch Negative and placed a stable outlook on the rating. This action followed a review of the company's results for fiscal 2008.

In the structured finance sector there was some fallout from the rating actions on AIG and its subsidiaries. One subsidiary, American International Assurance Co, is a reinsurance provider for Prime Insurance Group Ltd., a LMI provider on some RHG Group-originated mortgages. (RHG used to be known as Rams Home Loans before selling that brand to Westpac.) As a result, some ratings were lowered and others affirmed but all left on either CreditWatch Negative or Developing on some tranches of RMBS issued by RMS Series 2007-1HE Trust, RMS Series 2007-2H Trust, RMS Series 2007-3H Trust and RMS Trust Series UniCredit.

Moody's announced that it had upgraded the ratings on three classes of notes issued by Pepper Residential Securities Trust No.4. The Class A3 notes were upgraded to 'Aaa' from 'Aa1', the Class B notes to 'Aa2' from 'A2' and the Class C notes to 'A1' from 'Baa2'. The rating action reflects the strengthening in the credit profiles of the affected notes, based upon the actual performance of the transaction and the build-up of credit enhancement relative to expected future losses in the underlying non-conforming mortgage pool.

Similarly, two tranches of notes issued by Pepper Residential Securities Trust No.5 were upgraded. The Class A3 notes were upgraded to  'Aaa' from 'Aa1' and the Class B notes were upgraded to 'A1' from 'A2'.