S&P cuts WaMu further into junk on break-up worry

NEW YORK, Sept 24 (Reuters) - Standard & Poor's on Wednesday cut its counterparty credit rating on Washington Mutual Inc (WM.N) deeper into 'junk' territory, citing concerns the company may be split up in a potential sale.

S&P cut the rating by five notches to 'CCC', the eighth-lowest speculative grade, from 'BB-'. The outlook is negative, meaning the agency could lower the rating again.

The move is "due to the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors," analyst Victoria Wagner said in a statement.

Media reports this week suggested banking regulators may be getting involved in the effort to find a buyer for WaMu and may push for it to be split up.

That would generate losses for holding company creditors because the assets at the holding company are not enough to cover the full repayment of the $14.4 billion or rated unsecured debt outstanding, said Wagner.

Given the stress in the U.S. financial sector, there is only a small pool of potential acquirers that are not struggling with their own capital needs or with mortgage-related losses, making it more likely that a sale would involve just a part of the company, she said.

WaMu is pushing ahead with a deal by talking to multiple suitors, including Canada's Toronto Dominion Bank TD.TO, Banco Santander SA SAN.MC, Citigroup (C.N) and J.P. Morgan Chase & Co (JPM.N), sources said Tuesday. See [ID: nN23392354].

The cost of insuring WaMu's debt continued to rise on Wednesday. Credit default swaps on the company's debt rose to an upfront cost of 60.5 percent the sum insured, or $6.05 million paid upfront to insure $10 million in debt for five years, from 54.3 percent on Tuesday evening, according to Markit Intraday.

The swaps also require annual payments of 5 percent the sum insured.

CDS trade on an upfront basis when a company is considered distressed and sellers of protection want to be paid more at the outset of the contract due to higher perceived risk of the firm defaulting on its debt.

(Reporting by Ciara Linnane, Editing by Chizu Nomiyama)