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UPDATE 3-S&P cuts Bear Stearns on cash crunch, may cut again
March 14, 2008 / 6:34 PM / 10 years ago

UPDATE 3-S&P cuts Bear Stearns on cash crunch, may cut again

(Adds Moody’s action, updates credit default swap prices)

NEW YORK, March 14 (Reuters) - Three major rating agencies on Friday cut their ratings on Bear Stearns Cos BSC.N after the investment bank said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds.

They also warned that the ratings could be cut again.

The 28-day emergency line of finance came just days after Bear, which has been hard-hit by its heavy exposure to the faltering U.S. mortgage market, had dismissed market rumors of a cash crunch and said it still was a healthy player in the global web of trading and finance. For details, see [ID:nN14159647]

Standard & Poor’s cut Bear Stearns’ counterparty credit rating three notches to “BBB,” the second-lowest investment grade, from “A.” It also cut Bear’s senior unsecured debt to the same level, and cut its preferred stock rating to “BB-plus,” one level below investment grade.

Counterparty credit ratings reflect how well a company can meet its financial obligations with customers, trading partners or other parties.

“The ratings are based on our expectation that Bear will find an orderly solution to its funding problems,” S&P said in a statement. “However, although we view the liquidity support to Bear as positive, we consider it a short-term solution to a longer term issue that does not entirely affect Bear’s confidence crisis.”

“We also remain concerned about Bear’s ability to generate sustainable revenues in an ongoing volatile market environment,” S&P said. “The ratings could be lowered further if there is a failure to stabilize liquidity or to achieve a satisfactory longer term funding structure.”

Fitch Ratings cut Bear Stearns by four notches to “BBB” from “A-plus” and Moody’s Investors Service cut the bank’s long term rating by two notches to “Baa1,” the third-lowest investment grade.

Fitch said Bear Stearns’ financial performance in 2008 will be particularly challenged and opportunities will be limited in key business lines such as mortgage origination and securitization.

Moody’s noted that “Bear’s customer franchise has been hurt by this crisis, and it will continue to erode if a long-term stabilizing solution is not quickly achieved.”

The cost to insure Bear’s debt with credit default swaps ended around 45 basis points weaker at 730 basis points, or $730,000 per year for five years to insure $10 million in debt, according to broker Phoenix Partners Group.

The swaps had gyrated wildly throughout the day, initially tightening to 530 basis points, before gapping out to an upfront cost of 11 percent, a level that indicates distress, in addition to annual payments of 500 basis points.

Reporting by Karen Brettell; additional reporting by Dena Aubin; Editing by Diane Craft

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