S&P;, Moody’s May Lower 1st Interstate Debt Ratings

Standard & Poor’s said Wednesday it is considering downgrading the debt ratings of First Interstate because of its potential acquisition of BankAmerica Corp. At the same time, the rating agency said it is reviewing BankAmerica’s securities for possible upgrade.

Another bond rating firm, Moody’s Investors Service, made a similar announcment Tuesday.

The actions reflect market sentiment that First Interstate could be weakened by the merger, while troubled BankAmerica could benefit from combination with the smaller but healthier First Interstate.

It is common for rating agencies to downgrade acquiring firms in mergers because of the potential for dilution of common share values. Struggling firms that are takeover targets often see their stock value rise and can benefit from new capital provided by acquirers.

S&P; said, “If the transaction occurs, the combined entity’s below-average equity capitalization, substantial level of non-performing assets arising from BankAmerica’s poor quality loan portfolio and expected mediocre profitability represent increased risks for First Interstate’s bondholders.

“Partially offsetting these risks are the potential for substantial expense reduction through improved operating efficiencies, an improved market share in California and the preservation of capital achieved through the inclusion of a participating preferred stock as part of the proposed purchase price.

“BankAmerica’s creditors would benefit from the combination, as the new company’s capitalization, and financial performance would represent improvements over BankAmerica’s current levels,” the agency said.

About $6.5 billion of debt securities and $2.3 billion of commercial paper at the two banks are affected, according to S&P.;