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Buffett's Buyout Business Is a Risk for Wells Fargo (Update 1)

Updated to include Wells Fargo comments

NEW YORK (TheStreet) -- Wells Fargo (WFC) struck Wall Street gold when it won a key advisory and financing mandate on Berkshire Hathaway (BRK.A) and 3G Capital's $28 billion acquisition of ketchup maker Heinz (HNZ).

While Wells Fargo's advisory work on the buyout and a key role in underwriting the $14.1 billion in debt needed to finance the deal could indicate the benefits of having Berkshire and its head, Warren Buffett, as a top shareholder, it also creates new risks, according to ratings agency Moody's.

Moody's on Monday said Wells Fargo's role in the takeover of Heinz indicates the increasing presence of the nation's top mortgage lender in risky Wall Street activities such as leveraged buyout financing and debt trading. Such a move, Moody's says, could boost Wells Fargo's risk profile and put its sterling A2 credit rating in jeopardy.

"The financing is credit negative because it highlights Wells Fargo's primary capital market capabilities, which are lucrative but can lead to riskier activities," Peter Tischler, a Moody's senior vice president, said in the note.

"The Heinz credit commitment plays to Wells Fargo's strengths. However, the size of the deal, combined with Heinz's more stressed credit profile as a result of the higher leverage it will take on, poses risks."

[Wells Fargo shared Heinz's advisory and underwriting business with JPMorgan (JPM), the largest investment bank on Wall Street by revenue.]

At issue is whether Wells Fargo benefits from winning mega leveraged buyout mandates, such as the junk-rated debt financing associated with the proposed Heinz deal, or the over $8 billion in financing Berkshire Hathaway needed to buy railroad Burlington Northern Santa Fe.

Such work could cause Wells Fargo to increase its presence in debt trading markets, given the seemingly increasing amount of debt that the San Francisco-based lender appears to be underwriting in recent quarters.

Were Wells Fargo to see underwriting mandates like Heinz as a reason to increase its secondary trading businesses, Moody's contends it could distract the bank from its role in retail brokerage and lending businesses.

Meanwhile, holding inventory of high-yield buyout loans such as those needed to fund Heinz's takeover pose obvious balance-sheet risks.

"The residual risk scenario in any large underwriting, which we do not presume in this instance, is that the facilities cannot be sold and become nonperforming," Moody's writes of Wells Fargo's and JPMorgan's underwriting arrangement.

Wells Fargo doesn't see its underwriting work as adding risk for the bank and foresees no change to the way it does business.

"We do not agree with Moody's assertion that participation in capital markets activities necessarily leads to a higher risk profile, and disagree with their characterization of the risk profile of the transaction," Jessica R. Ong, a Wells Fargo spokesman, said in an e-mailed statement.

"Wells Fargo has strong risk management practices and a strong credit underwriting discipline and this transaction is fully in keeping with these disciplines and with our customer-focused business model."

Moody's raised similar comments about Wells Fargo's push onto Wall Street when the bank bought prime brokerage specialist Merlin Securities in April 2012. Wells Fargo's acquisition of Merlin targeted the trading needs of hedge funds, such as stock lending, clearing and risk-management work for trades across many asset classes.

The ratings agency characterized that deal as a "credit negative." However, it didn't downgrade Wells Fargo in a June 2012 cut of 15 bank ratings it said had significant capital-markets businesses.

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