NEW YORK (Reuters) - Washington Mutual Inc (WM.N), was downgraded to “junk” status on Monday by Standard & Poor’s amid concern about mortgage losses, causing shares of the largest U.S. savings and loan to slide after-hours following a 27 percent plunge in regular trading.
The credit rating agency lowered the Seattle-based thrift’s credit rating to “BB-minus,” three notches below investment grade, from “BBB-minus.” It cut its rating on Washington Mutual’s banking unit one notch to “BBB-minus” from “BBB.” S&P’s outlook is “negative,” indicating another cut is possible within two years.
Washington Mutual responded that none of its unsecured debt is subject to ratings-based financial covenants and that it does not expect the downgrade to have a material impact on its borrowings, collateral or margin requirements.
The company sees its capital levels at the end of the quarter significantly above the levels required of “well capitalized” institutions and that it has not changed its outlook for expected credit losses.
The announcement followed downgrades last week by Moody’s Investors Service and Fitch Ratings. Moody’s also cut the thrift to junk, while Fitch still rates it investment grade.
Washington Mutual on September 11 said it expects to set aside $4.5 billion in the third quarter for loan losses, down from $5.9 billion in the previous quarter. The thrift has reported $6.3 billion of net losses in the last three quarters.
“Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,” S&P said.
S&P also expressed concern about the thrift’s share price, which has fallen 94 percent in the last year, and said “it increasingly appears that market conditions could overtake credit fundamentals and leave the company with greatly diminished financial flexibility.”
Washington Mutual nevertheless has “adequate capital positions from a regulatory perspective,” with a stable deposit base, S&P said. Last week, the thrift said retail deposits as of August 31 were “essentially unchanged” from $143.6 billion at the start of the year.
In its statement the bank also said it has “de minimis” trading exposure to Lehman Brothers Holdings and no trading exposure to AIG. It has a maximum exposure to any one institution of $40 million.
Shares of Washington Mutual closed Monday down 73 cents at $2 on the New York Stock Exchange, following the bankruptcy of Lehman Brothers Holdings Inc LEH.N, which also had heavy mortgage and real estate exposure. The shares fell another 20 cents, or 9.5 percent to $1.80 after-hours.
Reporting by Jonathan Stempel; Additional reporting by Karen Brettell; Editing by Marguerita Choy and Bernard Orr