Moody's Investors Service upgraded Mellon Bank Corp. to its "A Team" with a caveat about the Pittsburgh company's growing leverage.

Mellon last week announced an agreement to buy AFCO Credit Corp., the nation's largest provider of insurance premium financing, for $100 million in cash.

The company would pay the current owner, Continental Corp., a New York-based insurer, up to $78 million more over five years, depending on loan growth.

In addition, Mellon this week is expected to complete its acquisition of the Boston Co. from American Express Co., another deal in which cash, rather than stock, is the major means of payment.

Double Leverage

Cash deals concern the rating agencies because generally debt is increased at the bank-holding-company level to support equity at subsidiaries - a concept known as double leverage.

Moody's warned that double leverage will increase markedly as a result of the Boston Co. acquisition. However, the agency believes it is manageable.

"Although we recognize that double leverage is high, we expect Mellon to reduce double leverage over the next year," Lawrence Pellecchio, assistant vice president at Moody's, said. "Other improving fundamentals have strengthened its outlook."

These include improved core profitability, asset quality, and capital, he added.

Expansion a Plus

In addition, the acquisitions of Boston Co. and Meritor Savings Bank, which Mellon bought earlier this year, strengthen core regional banking and its trust and investment management businesses.

Senior debt was raised to A3 from Baal, while subordinated debt and preferred stock were moved up to Baal from Baa2. The agency also raised ratings of the subsidiary Mellon Bank, to A1 from A2.

Separately, Thomson BankWatch assigned an A rating to Mellon's proposed $150 million of subordinated debt issue due June 1, 2003. Proceeds are to prepay debt issued in 1989.

Other rating actions last week included:

Bancorp Hawaii: Standard & Poor's revised the company's outlook to negative from stable, citing concerns about the state's economy.

"Hawaii has been negatively impacted by a slowdown in construction activity, largely attributable to lower levels of Japanese investment, and by reduced levels of tourism, exacerbated by the sustained weakness in the California economy," Standard & Poor's said.

The agency assigned an A rating to the subsidiary Bank of Hawaii's subordinated debt and affirmed the holding company's A senior unsecured and A1 commercial paper ratings.

The grades reflect Bancorp Hawaii's strong market share, good profitability and asset quality, and adequate capital ratios, Standard & Poor's said.

Bayerische Vereinsbank: IBCA, a European rating agency, upgraded this German bank's long-term debt to AA-plus from AA but kept short-term debt at A1-plus.

Chemical Banking Corp.: Fitch rated a new issue of $200 million of 7.50% cumulative preferred stock BBB-plus. "The rating reflects strengthened core earnings enhanced by meaningful reductions in overhead costs, substantial liquidity at both the parent and banking subsidiaries, modest parent company double leverage, and improving asset-quality measurements," Fitch said.

Separately, Fitch rated Chemical Bank's new $200 million issue of 7% subordinated notes, due June 1, 2005, A-minus.

Credit Suisse: IBCA confirmed the AAA long-term and A1-plus short-term ratings. It said the acquisition of Swiss Volksbank will reinforce Credit Suisse's domestic base. IBCA added that asset quality, profitability, and capital remain strong despite the recession in Switzerland.

First Alabama Bancshares: Standard & Poor's said it may downgrade A-plus subordinated debt and A1-plus commercial paper ratings. The review follows First Alabama's announcement that it is acquiring Secor Bank, a $2 billion-asset thrift based in Birmingham.

If ratings are lowered, subordinated debt would likely remain in the A and commercial paper in the A1 categories, Standard & Poor's said.

First American Corp.: Fitch upgraded $15 million of 7 5/8% senior debentures due 2002 to BBB-plus from BBB. The Nashville-based company has improved core earnings, reduced nonperforming assets, and increased capital, Fitch said.

First Deposit Corp.: Thomson Bankwatch upgraded this Louisville, Ky., company's issuer rating to A/B from B. Short-term debt was affirmed at TBW-term 1, agency's highest rating. "The company has been enjoying strong profitability in recent years due to its focused approach to the consumer lending business, particularly credit cards," BankWatch said.

First Tennessee National Corp.: Fitch upgraded senior debt to A from A-minus and revised the credit trend to "stable" from "improving." It cited the company's superior earnings, diversified businesses, reductions in nonperforming assets, and leading share of Tennessee's core deposits.

Mark Twain Bancshares: Standard & Poor's affirmed the St. Louis-based bank's senior debt at BB-plus and subordinated debt at BB-minus. But the company's outlook was revised to "positive" from "negative," and Standard & Poor's said an upgrade may occur in the intermediate term.

Although profitability and asset quality have improved, the company remains vulnerable to downturns in the local economy and commercial real estate, the agency said.

MBNA Corp.: Moody's upgraded senior debt to A3 from Baa2 and subordinated debt to Baa1 from Baa3.

Long-term deposits of the subsidiary MBNA American Bank were increased to A2 from A3, and its subordinated debt was increased to A3 from Baa2.

The agency said the upgrade reflects MBNA's diversified funding base, strong profitability, and strong market position in the credit card sector.

Midland Bank: IBCA upgraded long-term debt rating of this British bank to A-plus from A, saying it has been bolstered by ownership of HSBC Holdings.

Midlantic Corp.: Moody's upgraded senior debt to Ba2 from B1 and subordinated debt to B1 from B3. Declining nonperforming assets and improved capital and liquidity were cited.

Riggs National Corp.: Moody's lowered subordinated debt to Caa frcm B3. Long-term deposits issued by Riggs National Bank were cut to B1 from Ba2.

Moody's said the Washington company's recently signed regulatory agreements with the Federal Reserve and Comptroller's Office were significant factors in the downgrade. Riggs has been rocked by loan losses at its British bank unit.

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