MCGRAW HILL COMPANIES INC
Oct. 10, 2008--Standard & Poor's Ratings Services said that it revised its CreditWatch status on Wachovia Corp. to positive from developing and raised its counterparty credit rating on Wachovia to 'A+/A-1' from 'BBB-/A-3' in reaction to Wells Fargo & Co.'s announcement that it is proceeding with its original Oct. 3 plan to acquire all of Wachovia Corp.
Our rating on Wells Fargo remains on CreditWatch Negative where it was placed Oct. 3, 2008. As previously announced, under the definitive agreement between the two companies, Wells Fargo will acquire all outstanding shares of Wachovia's common stock in a stock-for-stock transaction. In the transaction, Wells Fargo will acquire all of Wachovia and all its businesses and obligations, including its preferred equity and indebtedness and all its banking deposits.
"The revision of Wachovia Corp.'s CreditWatch status reflects our expectation that the definitive agreement it has with Wells Fargo will close and that Citigroup Inc. and Wells Fargo's discussions concerning a possible sale of certain of Wachovia's banking assets have terminated. As a result, we returned our counterparty credit rating on Wachovia to where it was before the Sept. 29, 2008, announcement of the partial acquisition by Citigroup, and raised our ratings on the three series of Wachovia preferred stock--series J and K DRD (dividends received deduction) and series L convertible preferred--to 'A-' from 'BB' to align them with our other ratings on Wachovia and to reflect the pending acquisition by Wells Fargo," said Standard & Poor's credit analyst Victoria Wagner.
Wells Fargo has announced that it would acquire Wachovia in a stock transaction initially valued at $7 per share. This will be an unassisted acquisition of all of Wachovia Corp. Wells Fargo will raise up to $20 billion of equity. The boards of Wachovia and Wells Fargo have approved this agreement. We believe that this acquisition would greatly enhance the geographic span of Wells Fargo's banking franchise. Wells Fargo would emerge as the nation's largest core deposit banking institution. We expect $74 billion of purchase accounting adjustments or post-acquisition adjustments based on estimated lifetime losses and market-value adjustments on Wachovia's loans, other assets, and liabilities to minimize asset risk. Wells Fargo is awaiting all necessary shareholder and regulatory approval. As part of the original acquisition agreement, Wells Fargo and Wachovia have entered into a share exchange agreement whereby Wachovia will issue to Wells Fargo preferred stock that votes as a single class, with Wachovia's common stock representing 39.9% of Wachovia's voting power.
If the transaction with Wells Fargo closes, we could raise our ratings on Wachovia and its banking subsidiaries and equalize them to our ratings on Wells Fargo and its banking subsidiaries. Alternatively, if this transaction doesn't close for any reason, we expect the ratings on Wachovia to go back on CreditWatch Negative, reflecting our expectation of lower core earnings and capital pressures at Wachovia, and the possibility of a Citigroup transaction. We will affirm our ratings on Wells Fargo if this transaction is not consummated.
Wells Fargo's CreditWatch Negative status reflects the uncertainty surrounding core earnings and capital levels after this acquisition closes, and the integration issues related to the size and scale of Wachovia relative to Wells Fargo. Also, this transaction comes in an operating environment characterized by consumer credit concerns, weak housing and mortgage markets, and increasing recessionary pressures in the U.S. economy.
In resolving the CreditWatch status, we will weigh these uncertainties against the strong deposit and banking franchise that would emerge from this acquisition, including stronger geographic and business diversification. The core deposit base after the merger would be the largest in the U.S. with approximately $713 billion of core deposits. Wells Fargo will operate with $1.4 trillion of total assets.
To date, Wells Fargo's risk-management discipline and strong capital-management practices have differentiated its operating and earnings performance from its large bank peers in this historic weak banking cycle. Wells Fargo is not as exposed to the higher-risk segments of the structured finance markets or the leveraged loan markets as are other large banks.
Although Wachovia holds some higher-risk assets in its Corporate and Investment Banking business, they are not of a significant size relative to the combined firms post acquisition. We also expect Wells Fargo to pare down Wachovia's assets that do not conform to its existing business mix or risk-management discipline. We expect Wachovia's Corporate and Investment business unit to be significantly downsized after the acquisition.
We intend to resolve the CreditWatch within the next three months, pending final review of the financing, pro-forma capitalization, and core earnings profile of Wells Fargo after the acquisition of Wachovia. Upon closure of this transaction, we could either affirm or lower our long-term rating on Wells Fargo. We would also raise our rating on Wachovia and equalize it with that on Wells Fargo. If this transaction does not close, we would affirm our rating on Wells Fargo and place our rating on Wachovia on CreditWatch Negative.
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