S&P Cuts WaMu, Cites Breakup Concerns

Woes are clearly mounting for troubled thrift Washington Mutual (WM), which saw Standard and Poor’s Ratings Services cut its ratings on the Seattle-based thrift further into junk territory on Wednesday, following an earlier ratings cut by rival agency Moody’s Investors Service earlier this week. S&P said it had lowered its counterparty credit rating on Washington Mutual Inc. to ‘CCC/C’ from a prior rating at ‘BB-/B,’ and cut its rating on preferred shares at the bank. But S&P did affirm the ‘BBB-/A-3’ counterparty credit rating on Washington Mutual Bank because of the breadth of its retail franchise — the one strength to WaMu that has potential investors positioning for a potential purchase. Moody’s went further and had already cut the bank’s counterparty credit rating earlier in the week, as well, citing “severe asset quality issues which are depleting its capital base and leading to an erosion of its franchise.” For its part, S&P said that it was concerned that a breakup of the bank holding company would adversely affect creditors. “The downgrade was due to the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors,” said Standard & Poor’s credit analyst Victoria Wagner, in a press statement. S&P said that a partial sale of the bank would expose holding company creditors to losses, because the assets at the holding company are not sufficient to cover the full repayment of the $14.4 billion of rated unsecured debt outstanding. Earlier this week, a source close to the FDIC suggested to HW that regulators were putting pressure on WaMu to find a deal before Friday; the bank reportedly has many suitors, including Wells Fargo & Co. (WFC) and Citigroup Inc. (C), but most are pressing for government assistance in any deal. Our sources suggested it was likely that a purchaser would allow the thrift to fail, and purchase the “good” parts of WaMu while leaving the FDIC to manage the “toxic waste.” That toxic waste includes plenty of residential mortgages. WaMu’s $231.1 billion loan portfolio includes $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit. Total nonperforming assets jumped to $11.2 billion at the end of the second quarter, up 22 percent from the first quarter and nearly three times the NPAs recorded one year earlier. Shares in Washington Mutual were at $3.12, off 2.34 percent, when this story was published. Disclosure: The author held no relevant positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.