Shawmut, BayBanks ratings may be raised by Moody's.

Moody's Investors Service Inc. said Thursday it may raise the debt ratings of Shawmut National Corp. and Baybanks Inc.

The possible upgrades, the latest sign of the New England economic recovery, would propel Shawmut's subordinated debt and Baybanks senior debt out of junk-bond status.

The agency said the reviews reflect reduced nonperforming assets and improved capital levels at both banks.

Raised Once Before This Year

Moody's has already raised each bank's ratings once since December.

Moody's is reviewing Shawmut's investment-grade Baa3 senior debt and junk-grade Ba1 subordinated debt, Ba2 cumulative preferred stock, and Ba3 noncumulative preferred stock.

The company's preferred stock would likely remain below investment grade even after an upgrade.

BayBanks' Ba1 senior debt rating is being reviewed. The $9.8 billion-asset Boston company has no other rated debt, but issues by its subsidiaries are also under review.

"The New England banks have now come full circle through the process of the resolution of nonperforming assets," said Allerton Smith, analyst at First Boston Corp.

"While the profitability of the banks in the long term will depend on the revival of the New England economy and loan growth," he added, "they certainly have stabilized and improved by a significant degree the risk measures in their balance sheets."

Stemming Tide of Bad Loans

Shawmut and BayBanks both struggled during 1990 and 1991 to stem a tide of bad loans. Shawmut posted more than $300 million in total losses in that period, and Baybanks lost $60 million. But both banks have returned to profitability.

After selling $309 million of nonperforming real estate assets in the second quarter, Shawmut lowered its ratio of problem assets to loans and foreclosed properties to 3.38% on June 30 from 9.5% the year before.

"Disposing of the commercial real estate left the company with a much smaller burden of nonperforming loans and stronger reserve coverage," said Joseph Labriola, bond analyst with Kidder, Peabody & Co.

BayBanks' ratio of nonperforming loans and foreclosed real estate to loans and foreclosed real estate dropped to 5.00% at the end of June from 6.60% one year earlier. Moody's raised Shawmut's senior debt into investment-grade territory last February.

Others Are Investment Grade

Standard & Poor's Corp. rates Shawmut's senior debt an implied BBB-minus and subordinated debt BB-plus. It rates BayBanks' senior debt BBB-minus.

The other major New England banks, Bank of Boston Corp. and Fleet Financial Group Inc., are rated investment-grade by both major agencies.

A higher rating lowers a bank's borrowing costs and can improve its profitability. The yield spread of Shawmut's 10-year subordinated debt tightened Thursday by five basis points to a bid of 106 basis points over Treasuries, said Mr. Labriola.

The bonds were sold in April with a yield that was 138 basis points over Treasuries.

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