Fitch IBCA has downgraded the debt of Bay View Capital Corp., citing the California banking company's failure to unload the loans acquired last year when it bought a lender to fast-food restaurants, gas stations, and convenience stores.
Bay View officials and two banking analysts expressed surprise at the downgrade, since the $6.4 billion-asset company announced two weeks ago that it had hired Merrill Lynch to explore the possibility of a sale.
Selling the San Mateo company would send the debt ratings back up, they said.
The banking analysts disagreed, though, on whether Bay View should first sell off the finance unit, Franchise Mortgage Acceptance Corp. of Los Angeles, to attract more suitors.
Bay View's earnings have suffered since it bought Franchise Mortgage in March of last year. The banking company reported first-quarter net income of just $500,000, or 2 cents per share, compared with $7.1 million, or 37 cents per share, during the first quarter of 1999.
Bay View officials blamed the drop on sluggishness in the secondary market, which has forced them to keep the high-yield loans on its books rather than securitize them.
New York-based Fitch IBCA lowered Bay View's rating from "normal" to "rating watch negative." Lawrence G. Meding, an analyst at the rating agency, said it was concerned about capital constraints created by the illiquidity of the loans.
Balance-sheet flexibility is now limited because the franchise loans make up most of the Bay View loan portfolio, Mr. Meding said. And low profitability at Bay View Bank casts doubt on its ability to deliver dividends to the parent company for servicing subordinated debt and trust-preferred securities, he said.
R. Jay Tejera, a senior analyst with Ragen MacKenzie in Seattle, and Gary Townsend, a senior analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va., expressed surprise about the ratings change.
"If there is an announcement that Bay View has been acquired, Fitch will just have to upgrade those bonds again, because they'll have the implicit guarantee of a much larger bank," Mr. Tejera said.
Mr. Townsend said Bay View would attract more suitors if it sold off Franchise Mortgage. That "would improve Bay View's valuation, which would improve its salability," Mr. Townsend said.
Such a sale might attract superregional banks such as Wells Fargo & Co., he said.
But Mr. Tejera took the opposite view. "I would be surprised to see the selloff happen," he said. "It's a big part of the franchise's value, and it's not losing money."
The problem, he said, is just that Bay View lacks the cash to fully support all the originations that Franchise Mortgage can produce. "A larger buyer like Bank of the West and Washington Mutual is necessary to absorb it all," Mr. Tejera said.
Scott Ray, Bay View's chief financial officer, said that either bank analyst could be right.
"Some parties that may be interested in buying Bay View may see Franchise Mortgage as adding more value, and some might see it otherwise," Mr. Ray said. "The board, with the help of Merrill Lynch, is evaluating all of these considerations."