Here we go - the rating agencies are now officially in the game. Next up - collateral calls and other nasty stuff: "Today, Fitch Ratings issued a number of separate press releases placing on Rating Watch Negative most U.S. bank and bank holding companies' Support Ratings, Support Floors and other ratings that are sovereign-support dependent. The two companies mostly impacted by this announcement are Bank of America Corporation and Citigroup, Inc." BBB+ coming up.
Fitch Ratings has placed the long-term and short-term Issuer Default Ratings
(IDRs) as well as the Support and Support Floor ratings of Bank of America Corporation (BAC) on Rating Watch Negative following initial interpretation of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implications for systemically important financial institutions.
FI Ratings Potentially Impacted by Proposed FDIC Rules' for additional information. Fitch's ratings of banks have always encompassed a view of intrinsic creditworthiness expressed through the Individual rating, while Fitch's view of Support has been expressed separately through its Support framework. Support Ratings communicate Fitch's judgment on whether a bank would receive support from the U.S. Government should this become necessary.
The recently enacted legislative framework and potential regulatory rulemaking primarily affect Fitch's sovereign Support framework.
At the present time, Fitch's current long-term 'A+' IDR rating for BAC incorporates a three-notch uplift for the long-term rating and a two-notch uplift for the 'F1+' short-term ratings. If Fitch determines on a going forward basis that support from the sovereign state can no longer be relied upon it is not certain that Fitch would immediately lower the IDRs of BAC to its unsupported rating level. Over the near-to-intermediate term, Fitch's fundamental credit assessment of BAC will continue to consider existing support already received, such as debt still outstanding issued under the Federal Deposit Insurance Corp. (FDIC's) Temporary Liquidity Guaranty Program (TLGP), in its ratings. As a result, IDRs will continue to incorporate support received during the crisis, as well as recent improvements in BAC's intrinsic financial profile and Fitch's expectations for continued improvement.
Fitch has maintained a '1' Support Rating on BAC, translating into a Support Rating Floor of 'A+', since the depths of the recent financial crisis. Fitch's rating criteria calls for the assignment of the 'higher-of' BAC's Support Rating Floor of 'A+' or its perceived fundamental stand-alone IDR rating (excluding support), which is currently 'BBB+/F2'. Since Fitch is placing on Rating Watch Negative all U.S. bank and bank holding companies' Support Ratings and Support Rating Floors, the IDRs of BAC and its sovereign support dependent ratings are also placed on Rating Watch Negative.
The stand-alone IDRs are driven by the Individual rating which is currently 'C'. In August 2010, Fitch upgraded BAC's Individual rating from 'C/D' reflecting efforts to boost common equity and liquidity combined with stable to improving asset quality trends in various portfolio categories. The upgrades were constrained by BAC's remaining challenges including a still high level of non-performing loans (NPLs), large reps and warranty exposure in the mortgage business as well as ongoing legal issues associated with the Merrill Lynch and Countrywide acquisitions. Further upgrades of the Individual rating and the unsupported IDRs are a possibility if operating earnings stabilize and/or increase, asset quality trends continue to improve, greater clarity emerges on ultimate reps and warranty exposure in the mortgage business and legal risks diminish. The Individual rating could be negatively affected if asset quality again deteriorates, which is not expected at least in the near term. Downward rating pressure could emerge if reps and warranties losses escalate appreciably, particularly in cost result in operating losses and erosion of capital.
BAC is one of the largest U.S. banks in terms of total deposits, loans, branches, mortgage originations/servicing and credit card issuance. Following its January 2009 merger with Merrill Lynch & Co., Inc. (Merrill), BAC became one of the top financial institutions in wealth management and investment banking.
And there's this:
Today, Fitch Ratings issued a number of separate press releases placing
on Rating Watch Negative most U.S. bank and bank holding companies'
Support Ratings, Support Floors and other ratings that are
sovereign-support dependent. The two companies mostly impacted by this
announcement are Bank of America Corporation and Citigroup, Inc. This is
due to the fact that both entities', and their related subsidiaries',
Issuer Default Ratings (IDRs) and their respective senior debt
obligations have benefited from support provided by the U.S. government.
At the present time, Fitch's long-term 'A+' IDR ratings for Citigroup
and Bank of America incorporate a three-notch uplift for the long-term
rating and a two-notch uplift for the 'F1+' short-term ratings. If Fitch
determines on a go forward basis that support from the sovereign state
can no longer be relied upon it is not certain that Fitch would
immediately lower the IDRs of Bank of America or Citigroup to their
unsupported rating levels. Over the near to intermediate term, Fitch's
fundamental credit assessment of Bank of America and Citigroup will
continue to consider existing support already received, such as debt
still outstanding issued under the Federal Deposit Insurance Corp.
(FDIC's) Temporary Liquidity Guaranty Program (TLGP), in its ratings of
those institutions. As a result, the IDRs will continue to incorporate
support received during the crisis, as well as improvements in intrinsic
financial profiles and expectations for continued improvement.
Each of these companies has maintained a '1' Support Rating, translating
into a Support Rating Floor of 'A+', since the depths of the recent
financial crisis after each firm received and benefited from
extraordinary direct support from the U.S. government. Fitch's rating
criteria calls for the assignment of the 'higher-of' either the
companies' Support Rating Floor of 'A+' or its perceived fundamental
stand-alone IDR rating (excluding support), which is currently 'BBB+/F2'
for both affected companies. Since Fitch is placing on Rating Watch
Negative all U.S. bank and bank holding companies' Support Ratings and
Support Rating Floors, the IDRs of Bank of America and Citigroup and
their respective sovereign support dependent ratings are also placed on
Rating Watch Negative. The IDR and issue-level ratings for all other
banking companies, except for Bank of America and Citigroup and certain
related affiliates, are unaffected by today's actions since the current
IDR ratings are all above their current Support Rating Floors.
Today's actions follow Fitch's interpretation of the recently released
Notice of Public Rulemaking 'Implementing Certain Orderly Liquidation
Authority Provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act' (proposed rule or NPR), which was issued by the FDIC on
Oct. 12, 2010. The proposed rule will govern the way the FDIC implements
the resolution of financial institutions, such as bank and insurance
holding companies or other non-bank financial institutions deemed to be
systemically important, an authority granted to the agency by
Dodd-Frank. The NPR reiterates that under no circumstances should
taxpayers ever be called upon to bail out systemically important
financial institutions in the future, nor be exposed to loss in the
resolution of these companies. While the NPR also reiterates the FDIC's
mission of resolving institutions in a manner that 'maximizes the value
of the company's assets, minimizes losses, mitigates [systemic] risk and
minimizes moral hazard,' it nevertheless makes clear that creditors,
including senior bondholders, should bear their proportion of the loss
in an orderly resolution. This more stringent mandate to impose losses
on senior unsecured creditors calls into question the very core of
Fitch's Support rating framework, the likelihood of full and timely
payment in the event that the rated institution faces serious financial
deterioration in the future.
Resolution of the Rating Watches will be based in part on language from
the final rule once formally adopted as well as Fitch's view on how the
final rule will impact its view of support. The FDIC's proposed rule is
likely to mean that should intervention be necessary some creditors,
namely senior debt, subordinated debt, and preferred and common
shareholders will incur losses consistent with their treatment as if the
entity filed a Chapter 7 (liquidation) bankruptcy petition. Importantly,
Fitch has not imputed sovereign support in its ratings for bank holding
company creditors, i.e. most U.S. bank holding companies carry a '5'
Fitch believes that the NPR is one of many across numerous jurisdictions
globally to govern how policy makers and regulators may address failing
or failed institutions in the future. Recently introduced resolution
regimes in some countries in Europe have so far provided similar
wide-ranging powers to the banking authorities to impose losses on bank
creditors but have, nevertheless, left open the possibility of taxpayer
The proposed NPR appears to divide senior creditors' claims by maturity
and stated purpose and introduces a number of considerations for Fitch's
ratings of these systemically important institutions. Fitch notes that
some obligations, including short-term senior debt and certain other
creditors such as 'commercial lenders or other providers of financing
who have made lines of credit available to the covered financial company
that are essential for its continued operation and orderly liquidation'
are specifically differentiated from senior bondholders in the NPR.
Should this carve out provision remain as part of the final rules, Fitch
would need to consider how best it would rate the segregated obligations.
The proposed rule, as required by U.S. law, is subject to a public
comment period of at least 30 days from publication in the Federal
Register so it is important to note that material changes to the
proposal could occur before enactment. Once implemented, it is believed
that the proposed rule will serve as the road map by which the FDIC
implements its expanded authority in the resolution of a systemically
important failed institution.
In the past, systemically important institutions that became troubled
typically received some form of federal support and/or regulatory
forbearance that allowed them to continue operating through a
rehabilitation period, with creditors and shareholders often becoming
significant beneficiaries. The FDIC has used a 'least cost [to the
deposit insurance fund] resolution' approach in carrying out its
resolution activities since the Financial Institutions Regulation,
Reform and Improvement Act (FIRREA) of 1989. This approach is preserved
in the NPR and is consistent with the Dodd-Frank mandate of maximizing
the value of assets and minimizing losses. The proposed rule
additionally preserves many tools for the FDIC to use to further
incorporate the requirements of Dodd-Frank that resolutions mitigate
systemic risk and minimize moral hazard.
Fitch has long recognized through its Support Ratings the role that
support plays in global banking. In most developed markets, governments
have historically taken a dual approach to assuring the stability of
their financial infrastructure including strong regulatory oversight on
the front end and backstopping critical components of the system in
times of duress. The proposed rule for implementing Dodd-Frank preserves
a wide array of tools for the FDIC to resolve systemically important
institutions while also mitigating systemic risk and financial
contagion. Under the proposed resolution approach, select creditors may
benefit from some forms of support under certain circumstances and
where, in the judgment of the FDIC, the alternatives would ultimately
put the system at greater risk. That said, whereas bondholders, both
senior and subordinated, and even shareholders, have benefited from
support in the past, direct support for these creditors is effectively
prohibited under Dodd-Frank.