Midlantic Corp.'s debt moved three steps closer to respectability last week.

Standard & Poor's Corp. upgraded the Edison, N.J., company three notches.

Senior debt. raised to BB from B, now rests two notches below investment grade. Subordinated debt was also increased three notches, to B-plus from CCC-plus.

In addition, uninsured certificates of deposit of its two main bank units, Midlantic National Bank, Edison, N.J., and of Continental Bank, Norristown, Pa., were raised by two notches to BB-plus/B from BB-minus/B.

Behind Three-step Upgrade

Robert Swanton, an analyst at Standard & Poor's, noted that the three-step upgrade for the holding company is unusual but partly reflects technical rating considerations.

"As a company deteriorates, we tend to expand the differential between a holding company and its banks," he said. "The risk at the holding-company level magnifies as a company nears bankruptcy."

With Midlantic's financial condition improving dramatically in the last year, Standard & Poor's eliminated the rating differential between Midlantic and its bank units, Mr. Swanton said.

Shedding Problem Assets

Standard & Poor's said Midlantic merits the big upgrade because of its recent equity offering and plans to dispose quickly of problem assets.

Midlantic in the first quarter set aside a $58 million provision to cover potential losses on $244 million in nonperforming real estate assets earmarked for bulk sale.

The company earned $23 million in the quarter, versus a $29 million loss in the 1992 period.

Mr. Swanton said the ratings outlook is now "stable," meaning no further upgrades loom. "They still have a way to go," in terms of reducing nonperforming assets and improving generation of earning assets, he added.

Other actions by the rating agencies last week included:

Banco Nacional de Mexico: Standard & Poor's Corp. assigned A/A1 ratings to peso-denominated certificates of deposit of the bank, known as Banamex.

Bank of New York Co: Fitch Investors Service upgraded senior debt to A-plus from A, subordinated debt to A from A-minus, and preferred stock to A-minus from BBB-plus.

Fitch noted that nonperforming assets as of the first quarter were down 64% from the level on Dec. 31, 1991. It said it expects nonperformers to decline this year, even including bad loans assumed from National Community Banks, a New Jersey bank that Bank of New York is buying.

"Also, asset quality benefits as the company, has the lowest percentage of commercial real estate in its loan portfolio of any major domestic banking institution." Fitch said.

Chase Manhattan Corp.: Standard & Poor's upgraded senior debt to A-minus from BBB-plus, subordinated debt to BBB-plus from BBB-minus, and preferred stock to BBB from BBB-minus. Chase Manhattan Bank's certificates of deposit, bank notes, and deposit notes were increased to A/A1 from A-minus/A2.

Duff & Phelps increased senior debt to A-minus from BBB, subordinated debt to BBB-plus from BBB-minus, and preferred stock to BBB from BB-plus. The upgrades followed the sale last week of 22 million Chase common shares, which raised $650 million.

Standard & Poor's said the sale "represents an acceleration of its capital-strengthening program of recent years. Capital and reserves are now in line with other A-rated money-center banks."

In addition, the agency said that the proposed accelerated sale of real estate loans will reduce commercial real estate exposure to 8.3% of loans.

The carrying value of the portfolio, originally valued at $2 billion, has been discounted by 39%. The writedown "should ensure their salability over the next two years," the agency said.

Credit Lyonnais: Moody's downgraded the French bank because of concerns about its asset quality.

It noted that credit quality has become an increasingly important issue in light of the French government's announced plan to sell its stake in Lyonnais to the public.

Moody's said it continues to see weakness in industries in which Lyonnais has a high concentration of loans - real estate development and the film industry.

"In addition, by sometimes combining large loan exposures with direct investments into potentially risky companies, Credit Lyonnais has further added to its credit risk," Moody's said.

Senior debt, long-term certificates of deposit, and long-term letters of credit were cut to A1 from Aa3; senior subordinated debt to A2 from A1.

Fifth Third Bancorp: Fitch upgraded $143 million of 4.25% convertible subordinated notes to AA-minus from A-plus. It said the higher rating reflects the Cincinnati company's high fee-based revenues, low overhead, and substantial capital.

"The company's nonperforming asset ratio at the end of 1993's first quarter was only 0.48%, the lowest level among all U.S. banking companies with more than $3 billion in assets," Fitch said.

But Fitch warned that the company's historically high profit margins may be threatened by intensifying competition in its region.

Norwest Corp.: IBCA upgraded the Minneapolis company's long-term debt to AA-minus from A-plus and short-term debt to A1-plus from A1. Stronger capital and asset quality were cited.

Western Federal Savings & Loan Association: Standard & Poor's said it was reviewing CCC-minus/C ratings on the uninsured certificates of deposit of this Marina Del Rey, Calif., thrift. The thrift was recently seized by the Office of Thrift Supervision and a new mutually owned institution was established in its stead.

"A successful sale of the institution or transfer of deposits could have positive implications for the CD ratings; a liquidation could be negative," Standard & Poor's said.

Western Financial Savings Bank: Moody's assigned a Ba3 rating to the Irvine, Calif, bank's $100 million of subordinated capital debentures. The issue earlier was rated BB-plus by Standard & Poor's Corp.

Moody's said its rating reflects continuing concerns about the thrift's asset quality, concentration of multifamily loans in California, and moderate earnings.

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