MBNA Corp.'s debt ratings are coming under fire as a result of its expansion plans.
In the past week, Moody's Investors Service and Standard & Poor's placed the credit card specialist under review for possible downgrade because of the company's plans to purchase PNC Bank Corp. credit card operations, including roughly $2.9 billion in credit card receivables.
The company has to come up with $3.3 billion in cash to pay for the receivables.
The purchase, said analysts at both agencies, would put pressure on MBNA's already thin capital ratios.
Moody's, which placed the company on review on Monday, rates MBNA Corp.'s senior debt Baa2 and the senior debt of its principal subsidiary Baa1.
Standard & Poor's rates MBNA BBB-plus for the bank
If MBNA is downgraded "it moves (the company) a step closer to losing investment-grade status," said bank bond analyst William King of Warburg Dillon Read. MBNA is "still investment grade, but it appears as if it is getting real close, which means there could be a significant effect on the company's funding."
And if the company were downgraded to junk status "investment-grade buyers wouldn't like it and your true high-yield investors would not think that the debt was cheap enough compared to others."
So far the ratings announcements have not caused MBNA's bond spreads-the difference their yields and the yields on Treasuries-to weaken.
Spreads were already weakened when investors fled to better quality bonds two months ago, traders said. Pre-holiday trading also was quiet, they added.
Standard & Poor's and Moody's have been warning the company about its massive securitizations, thinning capital ratios, and falling profitability for the last year and a half. MBNA has said there is no reason for concern. Ratings analyst Tanya Azarchs of Standard & Poor's said MBNA's planned acquisition would result in $440 million of goodwill and in more leverage.
According to Ms. Azarchs, tangible equity plus reserves over total managed assets as of Sept. 30 was 3.1%, down from 3.3 in December 1997, 4.0 in December 1996, 4.3 in December 1995, and 4.5 in December 1994.
"If they finance this PNC deal with cash, it would bring (the ratio) down sharply to 2.4%," said Ms. Azarchs.