Capital Markets

Moody’s Downgrades BofA, Lifts Merrill

Ratings on Merrill Lynch are now the same as for Bank of America, which acquired Merrill on Jan. 1. The outlook, though, is negative.
Stephen TaubJanuary 8, 2009

The debt ratings of Bank of America Corp. and its subsidiaries were lowered by Moody’s Investors Service. However, Moody’s also raised to BoA’s levels the ratings of Merrill Lynch, which BofA officially acquired on Jan. 1.

The rating agency cut BofA’s senior debt to Aa3 from Aa2 and the ratings on its subsidiaries, including its lead bank, Bank of America N.A. Moody’s bank financial strength rating on the lead bank was lowered two notches to B from A-, which it explains translates to a change in the baseline credit assessment to Aa3 from Aa1. The Prime-1 ratings on the short-term obligations of all Bank of America entities were affirmed. Moody’s also noted that the rating outlook is negative.

On the other hand, Moody’s raised the debt ratings of Merrill Lynch, so that they now match those of Bank of America Corp., while the debt and deposit ratings of Merrill Lynch’s U.S. bank subsidiaries were raised to equal those of Bank of America’s bank subsidiaries.

This completes Moody’s rating review that began on Sept. 15.

Moody’s explained that the downgrade and negative outlook on Bank of America reflect the rating agency’s view of the greater challenges Bank of America and Merrill Lynch are likely to face over the next few years under a more difficult economic environment. “Bank of America has taken a number of steps recently to bolster its capital position,” said Moody’s Senior Vice President, David Fanger, “but we believe that its pro forma tangible common equity position remains relatively weak, leaving a modest cushion to absorb unexpected losses.”

In addition, Moody’s asserted the combined company’s equity position is unlikely to improve substantially before 2010 because of reduced earnings from capital markets activities and the need to sustain high loan-loss provisions to absorb higher credit costs, most notably in credit cards and residential real estate loans.

“The downgrade and negative outlook also reflect the challenges which Bank of America faces in integrating Merrill Lynch,” Moody’s added. It explained that while Bank of America has demonstrated a solid track record in integrating traditional commercial banks, it believes the challenges of integrating an investment banking and wealth management franchise are significantly greater than those involved in a traditional commercial bank acquisition.

“Bank of America typically imposes its own systems and practices upon an acquired firm, which, as noted, has worked effectively with commercial banks,” Moody’s said. “However, in the case of Merrill Lynch, this approach carries a greater risk of employee defections.”

Moody’s did note that Bank of America’s ratings continue to be supported by its strong franchise. The bank has market leading positions in U.S. deposits, credit cards, and mortgages, it added.

“The addition of Merrill Lynch’s wealth and asset management businesses further diversify Bank of America’s business mix,” Moody’s said. “The bank has also been prudent in managing its borrower and counterparty concentrations. Solid liquidity profiles at both the bank and the parent holding company provide further creditor protection.”

Moody’s noted that as a result of the acquisition, Merrill Lynch and its subsidiaries have become subsidiaries of Bank of America Corp., rather than being merged into Bank of America. Bank of America has also not guaranteed or assumed any outstanding debt of Merrill Lynch or any of its subsidiaries other than Merrill Lynch’s outstanding preferred stock. “Nevertheless, the upgrade reflects the strategic importance of Merrill Lynch to Bank of America, and Moody’s expectation that over time the integration will increase the financial linkages between Merrill Lynch & Co. and Bank of America Corporation,” it added.