Bank of America, Citigroup Face Debt Downgrade: Moody's (Update 1)

Updated with details from a Jan. 19 Moody's note in fourth paragraph.

NEW YORK (TheStreet) -- Moody's Investors Service is expected to announce downgrades to large global banks that play an outsized role in the capital markets, due to "Eurozone weakness and elevated economic and market uncertainties," according to a research report published Monday by CreditSights.

Bank of America(BAC),Citigroup(C) , JPMorgan Chase(JPM) ,and Wells Fargo(BAC) are among U.S. institutions likely to see downgrades.

"The agency alluded to possible two- to three- notch negative impacts for all these players, but more particularly to the pure-play capital market players such as Goldman Sachs(GS) and Morgan Stanley(MS)," the report states, citing comments made on a Feb. 1 conference call.

The agency will likely reduce "standalone" ratings for the group as a whole "from the single-A range to the Baa range probably beginning in the first quarter of 2012 with a review notification and ratings actions within 90 days or so thereafter," according to the report. Standalone ratings refers to ratings that assume no government support for the banks in question.

Moody's stated in a Jan. 19 "special comment" that "we expect to lower our standalone credit assessments of many global capital markets intermediaries, including broader-based banking groups with significant capital markets operations." That note (which did not mention companies by name) added that "long-term - and in some cases potentially short-term - debt and deposit ratings of these institutions will likely also be affected." Long term ratings do incorporate the likelihood of government support.

CreditSights' analysts did not specify precisely when Moody's held its call, though it appears to have been more than a week ago, since the report states that "credit spreads barely reacted for the week after the Moody's presentation."

In fact, according to CreditSights, credit default swaps (CDS) which measure the risk of default actually tightened (showing the market sees reduced default risk) 15-50 basis points, or from 0.15-0.50%. CreditSights attributes the CDS rally to "scaled back concerns regarding the macro environment."

However, following the announcement Thursday of a multi-billion dollar settlement over mortgage servicing, CDS widened (showing perceived greater default risk) by 0.14-0.34%, according to CreditSights.

Despite the initial market non-reaction to Moody's comments, CreditSights analysts argue the CDS could weaken temporarily once Moody's actually announces the downgrades.

Still they contend that "for the past two years, the big banks/brokers have been repositioning their funding activities in advance of these potential rating agencies' adverse actions." The analysts have an "outperform" rating on five- and 10-year bonds and CDS of Morgan Stanley, Citigroup and Goldman, and "market perform" on Bank of America and Wells. For JPMorgan, they have a "market perform" rating on five-year CDS and "outperform" on five- and10-year bonds.

-- Written by Dan Freed in New York.

Readers Also Like:

5 European Stocks Rising Despite Debt Mess

10 Stocks of Top-Performing Funds in 2012

>To order reprints of this article, click here: Reprints