Standard & Poor's Ratings Group has downgraded Star Banc Corp. noting an increase in leverage from its acquisition of 24 branches from Household Bank FSB.
S&P lowered its rating on $500 million of senior bank notes to A/A1 from A-plus/A1; $150 million subordinated notes to A-minus from A; uninsured certificates of deposit to A/A1 from A-plus/A1; long-term counterparty to A from A-plus.
The Tier 1 leverage ratio resulting from the acquisition is below that which S&P considers suitable for the A-plus category. A-plus rated banks are usually the larger banks with strong regional presences, such as BankAmerica Corp., NationsBank Corp., and First Union Corp.
Other banks, such as PNC Bank Corp., have also experienced leverage- related downgrades.
Leverage from acquisitions per se, however, is often not the only reason for a downgrade. Star's downgrade also reflected a lack of geographic and business line diversification, said Robert Swanton, a manager at S&P.
"We look for substantially stronger financial performance to offset the risks of less diversification," said Mr. Swanton. The downgrade does not suggest a negative performance direction, but rather points out the relative financial performance, he said.
"In most cases, leverage is the last straw in a downgrade," said Mr. Swanton.
Pressure on profitability and capital from PNC's interest rate positioning led to lower capital levels, which concerned S&P. On top of that, the bank orchestrated several acquisitions and a large stock buyback.
Leverage induced downgrades are not the standard at S&P. "The companies that find themselves under more financial pressure all around are more likely (to be downgraded with increased leverage) than those that have financial flexibility," said Mr. Swanton.
