FujiBank Ltd., the largest provider of municipal letters of credit, was stung by a downgrade yesterday when Moody's Investors Service lowered its long-term ratings to Aa3 from Aa1.

Fuji's short-term rating will remain at the highest level, Prime-1, according to Moody's. The short-term rating is considered paramount in most letter-of-credit backed deals because enhanced issues are almost exclusively variable-rate issues with effective short-term maturities.

Fuji provides the most municipal letters of credit, enhancing approximately $11 billion of municipal securities.

Moody's said the bank's high exposure to real estate and other risky lending sectors prompted the action.

Also, the scandals that continue to plague the Tokyo stock markets figured directly into the downgrade. "Fuji was recently the victim of an internal fraud, which may result in substantial charge-offs," Moody's said in a release.

But Moody's noted that Fuji Bank's liquidity "is one of the best among its peers" and that its risk-based capital position is the highest of all Japanese banks.

Lisa S. Pent, assistant vice president of public finance at Fuji, said the liquidity and capital factors were enormous influences in mitigating the effect of the downgrade. Fuji has consulted with an independent market analysis firm, she noted, which said the trading differential will not affect Fuji's ability in a bidding situation.

"They say there's no difference in the yield curve," Ms. Pent said. "It should not have an impact."

She confirmed that Fuji will take a write-off related to internal fraud, which involved forged deposit receipts at a little-known regional credit union. But she added that in relation to the bank's capital position, the write-off would be "fairly small."

In secondary trading, meanwhile, junk bonds rose 1/4 to 3/8 point on the day as traders look for another ease in monetary policy. Investment grade bonds advanced anywhere from 1/8 to 3/8 point in sympathy with the Treasury market's jump on favorable economic data and strong retail buying.

Primary activity was light after heavy issuance earlier in the week. Unocal Corp. yesterday issued $200 million of non-callable notes due Aug. 15, 2001, hrough underwriter First Boston Corp.

The 8 3/4% notes were priced at 99.615 to yield 8.808%, 93 basis points over comparable Treasuries.

The manager expects the issue to be rated Baal by Moody's Investors Service and BBB by Standard and Poor's Corp.

In corporate ratings news, Moody's said it lowered the ratings of I.C.H. Corp.'s senior subordinated debt and notes to B2 from B1; the company's preferred stock rating to B2 from B1; and the financial strength rating of I.C.H.'s indirectly owned subsidiary, Southwestern Life Insurance Co., to Ba1 from Baa2.

Approximately $800 million of securities are affected.

Despite I.C.H.'s significant strides toward reducing its debt and Southwestern's leverage, Moody's said it believes Southwestern's association with the highly leveraged ultimate parent will diminish its ability to generate sales in the industry environment.

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