TEXT-S&P may cut Oriental Financial Group rating

Fri Jun 29, 2012 4:45pm EDT

Overview
     -- Puerto Rico-based regional banking company Oriental Financial Group 
announced a definitive agreement to acquire Banco Bilbao Vizcaya Argentaria 
Puerto Rico.
     -- We are placing our ratings on Oriental on CreditWatch with negative 
implications.
     -- We expect to resolve the CreditWatch listing based on our assessment 
of the pro forma capital structure, interim financial results, and our updated 
financial projections.

Rating Action
On June 29, 2012, Standard & Poor's Ratings Services placed its 'BB+' 
counterparty credit rating on Puerto Rico-based regional banking company 
Oriental Financial Group on CreditWatch with negative implications.

Rationale
The CreditWatch placement follows Oriental's announcement that it has entered 
into a definitive agreement to acquire Banco Bilbao Vizcaya Argentaria Puerto 
Rico (BBVA PR) for approximately $500 million in cash, which represents a 
slight 3% premium to BBVA PR's tangible book value. As of March 31, 2012, BBVA 
PR had approximately $5.2 billion in assets, $3.7 billion in loans, and $3.3 
billion in deposits. To facilitate the acquisition, Oriental will issue $84 
million of 8.75% noncumulative convertible perpetual preferred stock (expected 
to close on July 3) and expects to subsequently raise $65 million to $70 
million of nonconvertible perpetual preferred and common equity. In addition, 
to adhere to capital requirements and promote strategic goals, Oriental plans 
to deleverage, at or prior to closing, about $1.3 billion of its investment 
securities portfolio and approximately $450 million of the BBVA PR investment 
securities portfolio. We view Oriental's capital and earnings as very strong. 
However, should our pro forma calculation of its projected risk-adjusted 
capital ratio fall below 15%, we could lower our assessment.

Positively, we think the acquisition will improve Oriental's market position, 
diversify its business and loan portfolio, albeit within Puerto Rico, and 
broaden its funding given the increase in core customer deposits. We think 
Oriental could also significantly reduce noninterest expenses, given that BBVA 
PR has a similar geographic footprint to Oriental. Despite this acquisition, 
we believe that the banking market will remain highly competitive in Puerto 
Rico, but we think consolidation in recent years has somewhat reduced deposit 
pricing pressures. However, BBVA PR's weak credit quality, notably within its 
construction and commercial real estate loan portfolios, could modestly weigh 
on our risk position assessment for Oriental, even though loan performance has 
improved in recent quarters. Oriental will also take additional credit marks 
on acquired loans as part of the closing, and, after the transaction, 
approximately 75% of Oriental's total loans would have purchase accounting 
marks.

Finally, this announced acquisition is very large for Oriental, and the 
company could have a difficult time integrating it, although we do not expect 
this. We think Oriental performed considerable due diligence on the 
acquisition over several months, which should partially mitigate potential 
integration risks. We expect the transaction, which the Oriental board of 
directors and Banco Bilbao Vizcaya Argentaria S.A. (BBVA S.A.), the parent of 
BBVA PR, have approved, to close in fourth-quarter 2012. The completion of the 
transaction is subject to customary regulatory approvals and approval by 
Oriental's common shareholders. In conjunction with the transaction, Oriental 
expects to incur one-time restructuring charges of approximately $40 million 
in 2013.

CreditWatch
We expect that Oriental will be able to successfully integrate BBVA PR given 
Oriental's knowledge of the local market, the similar geographic footprint, 
and its experience integrating Eurobank, which it acquired in 2010 in an 
FDIC-supported transaction. We will evaluate the business and financial 
profiles of the combined entity to update the rating on the company once the 
acquisition is complete. In addition, we will monitor Oriental's progress in 
raising the additional capital, as well as Oriental's and BBVA PR's interim 
financial results. We could affirm the rating on Oriental or lower it by no 
more than two notches to 'BB-', based on the results of our assessment of the 
pro forma capital structure, interim financial results, and our updated 
financial projections.

Ratings Score Snapshot
Holding Company Rating                BB+/Watch Neg/--

SACP                                  bbb-                 
  Anchor                              bbb+                 
  Business Position                   Weak (-2)            
  Capital and Earnings                Very Strong (+2)     
  Risk Position                       Moderate (-1)        
  Funding and Liquidity               Below Average        
                                      and Adequate (-1)    

Support                               0                    
  GRE Support                         0                    
  Group Support                       0Sovereign Support                   0    
               

Additional Factors                    0                    

Related Criteria And Research
     -- Banco Bilbao Vizcaya Argentaria Puerto Rico 'BB+/B' Ratings Placed On 
CreditWatch Developing On Acquisition Announcement, June 29, 2012
     -- Banco Bilbao Vizcaya Argentaria Puerto Rico, Feb. 29, 2012
     -- Oriental Financial Group And Main Bank Subsidiary Ratings Affirmed, 
Dec. 13, 2011
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010

Ratings List

CreditWatch Action
                                        To                 From
Oriental Financial Group
 Counterparty Credit Rating             BB+/Watch Neg/--   BB+/Stable/--

Oriental Bank & Trust
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