Banking & Capital Markets

Blame It on the Bull: B of A Downgraded

The Merrill acquisition puts more pressure on Bank of America's capital, which was "already strained" by the Countrywide acquisition, says Standard...
Tim ReasonSeptember 15, 2008

Standard & Poor’s announced it was lowering Bank of America’s long-term counterparty credit rating from AA to AA- in response to news that the bank would acquire Merrill Lynch in an all-stock, $50 billion deal. The long-term ratings of the bank’s subsidiaries were also lowered one notch.

The Merrill announcement comes just two-and-a-half months after Bank of America’s July 1 acquisition of troubled mortgage lender Countrywide Financial Corp. The rating agency said that Merrill’s holdings of collateralized debt obligations (CDOs) backed by subprime residential mortage-backed securities would expose Bank of America to more residential housing risk even as the U.S. mortgage market continues to slide.

“The purchase of Merrill will place further pressure on B of A’s capital, already strained by the Countrywide acquisition,” Standard & Poor’s said in an announcement.

Standard & Poor’s acknowledged Bank of America’s successful history of “bold acquisitions,” but warned that the Merrill purchase is risky given the current market turmoil. “B of A has never integrated an investment bank the size of Merrill,” the rating agency noted. “Events of the past year demonstrate the high business risk of the securities industry.”

The rating agency did note that Merrill Lynch maintains strong positions in investment banking, retail brokerage, and wealth management. “The successful combination of these strong business lines with BofA’s second-tier investment banking and asset management positions would create a top-tier commercial and investment-banking group with significant growth potential when the financial industry emerges from its current downturn,” wrote Standard & Poor’s.

“Nonetheless, the near- to intermediate-term risks of capital strain and residual mortgage risk outweigh the potential long-term benefits,” the rating agency said.

The rating agency said it had placed the long-term ratings of Bank of America’s holding company and its bank subsidiaries on CreditWatch with negative implications. It also placed Merrill on CreditWatch with “developing implications,” meaning Merrill’s ratings could go up, down, or stay the same.