Standard & Poor's, citing fears the ailing thrift may not be sold in its entirety, cut the preferred-stock rating on Washington Mutual Inc. further into junk territory, while also slashing its junk-level counterparty credit rating five notches closer to default status.
The moves mark the latest blow against Wamu, which is being courted by a number of potential suitors to help it recover from a slew of troubles related to bad bets on mortgages. The mortgage lender is considering all options, from a straightforward sale to raising new capital to a government-assisted takeover, but investors have grown increasingly nervous as the company has yet to announce any major moves.
S&P's counterparty credit rating on Wamu was cut to CCC/C from BB-/B, while the preferred-stock rating was cut to CC from B-. Its outlook on the preferred stock remains negatives.
In cutting Wamu's grades Wednesday, S&P Credit Analyst Victoria Wagner cited "the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors."
S&P's latest cuts to Wamu's ratings come two days after Moody's Investors Service cut its rating on the preferred stock of the company's bank further into junk status while downgrading the bank's financial-strength grade. In contrast, S&P affirmed its counterparty-credit rating on the bank Wednesday, citing "the breadth of its retail franchise."
Shares of Wamu — which were up around 5% before news of S&P's ratings cuts — were recently down 0.3% to $3.19. The stock had been up earlier amid what was generally an up morning for financial stocks after billionaire investor Warren Buffett pledged late Tuesday to invest $5 billion in Goldman Sachs Group Inc., one of the last independent brokerages. Buffett's move has been seen as a vote of confidence in a crisis-stricken banking system.
The news of S&P's ratings cuts also helped send the cost of protecting the senior debt of Washington Mutual higher. It now costs investors around $6.1 million upfront plus $500,000 a year to protect $10 million of Washington Mutual's senior debt against a default. The upfront cost earlier in the session has been between around $5.7 million.
S&P warned that if Wamu isn't acquired in its entirety, "holding company creditors face losses, because the assets at the holding company are not sufficient to cover the full repayment of the $14.4 billion of rated unsecured debt outstanding."
The ratings agency said, "Given the stresses facing the broader U.S.-based financial institutions sector, the available pool of large bank acquirers that are not capital constrained or devoid of their own mortgage credit stress is quite small, raising the possibility that the purchase may be only partial."