Standard & Poor's Ratings Group Thursday lowered its ratings on $9.3 billion of outstanding debt at Bankers Trust New York Corp. and its banking affiliates.
Senior debt at the corporation was lowered to A from A-plus, subordinated debt to A-minus from A, and preferred stock to BBB-plus from A-minus.
"The modest downgrade reflects the impairment of the derivatives franchise as an engine of growth and product innovation for the corporation," said Tanya S. Azarchs, a director in the financial institutions group at the rating agency.
Bankers Trust's earnings "are not likely to recover soon to former high levels in two of its core business lines: derivatives dealing, and investment management and securities processing," Ms. Azarchs said in her report.
"Margin pressures in the respective industries are the principle cause, but negative publicity concerning sales practices for certain complex derivatives also apparently has taken a toll," Ms. Azarchs said.
S&P, which had placed Bankers Trust on negative credit watch Jan. 18, expressed confidence in the new management, headed by president and chief executive Frank Newman.
"The downgrade was expected," said Jean I. Sievert, a bank bond analyst at Chase Securities. "I think that after Bankers Trust's fourth quarter, we thought it started to look increasingly probable that S&P would drop the rating."
S&P had maintained a higher rating than Moody's Investors Service.
The immediate effect of the downgrade was to cause the yield on Bankers Trust's outstanding 10-year subordinated debt to widen by 5 basis points, to 90 basis points over comparable Treasuries.
Bond yields widen when investors perceive higher risk, and demand greater return to purchase a company's debt.
The ratings have been irrelevant to trading of Bankers Trust debt, one bank bond trader said. "Bankers Trust trades below a BBB-rated company," said the trader. "The bottom line is that it trades more like a brokerage firm than a bank."
Investors are still looking for stability, the trader said.
Even though Bankers Trust paper trades at cheap levels relative to commercial banks, it trades in-line with brokerage firms, he said.
Analysts said investors were not relying on the rating agencies to make decisions regarding Bankers Trust
"I can't imagine anyone was basing their decision to do business with Bankers Trust based on S&P's higher rating," Ms. Sievert said.
Long-term counterparty ratings at Bankers Trust Co. were lowered to A- plus from AA-minus; short term counterparty ratings were dropped to A1 from A1-plus; and Certificates of deposits and letter of credit supported issues were downgraded to A-plus/A1 from AA-minus/A1-plus.
