First Nationwide Merger Deal Worries S&P; Moody's Is Upbeat

Responding to First Nationwide Holdings' plan to acquire California Federal Bank, Moody's Investors Service and Standard & Poor's Ratings Group have placed the debt of First Nationwide on credit watch.

Standard & Poor's placed the company on credit watch with negative implications, while Moody's put the company on credit watch with uncertain direction citing the $1.2 billion deal.

Though the Moody's action allowed for a downgrade, it left open the possibility for an upgrade as well.

"Moody's seems to always give companies the benefit of the doubt with respect to merger synergies and cost cutting, while S&P gives no credit at the outset - they are very much the 'show me' agency," said John Works, a bank bond analyst at J.P. Morgan & Co.

A downgrade from either rating agency could affect the price of the deal, potentially increasing the cost of capital.

Rating changes "may affect the financing assumptions used by First Nationwide in terms of whether this deal will be economically feasible," Mr. Works said.

But Moody's analyst Tom Keller was decidedly positive about the merger, saying it would give First Nationwide "size, scale and market presence, as well as the opportunity for cost savings."

Nonetheless, Mr. Keller said that the way the deal is funded will determine the direction of Moody's rating action. "We don't know whether they'll fund the deal through the bank or the holding company, and we haven't had the opportunity to understand whether coverage will suffer," Mr. Keller said.

Standard & Poor's also recognized the potential benefits of the merger.

"California Federal Bank's retail franchise will significantly enhance First Nationwide's presence in Southern California," said Victoria A. Wagner, an S&P analyst, in her report.

Ms. Wagner, however, remained anxious about the debt burden. "Although the operating trends at First Nationwide Bank have been improving," she said, "the high degree of financial leverage at its holding company remains a concern."

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