S&P, Moody's Pile on Downey - TheStreet

S&P, Moody's Pile on Downey

The ratings agencies downgraded the troubled thrift to below investment grade.
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Standard and Poor's Ratings Services on late Friday downgraded

Downey Financial's

(DSL) - Get Report

counterparty credit rating, following a similar action by Moody's Investors Service late Thursday.

Citing its "increasing concerns about the substantial negative effect California's deteriorating housing market is having on Downey's credit performance, financial profile and capitalization," S&P lowered the counter party rating from BBB-/A-3 to BB+/B, and kept the Newport Beach, Calif. company on "rating watch negative."

Moody's downgraded its senior unsecured debt rating to B1 from Ba1 and lowered its bank financial strength rating for Downey's main subsidiary, Downey Savings & Loan Association, FA, to D from D+. Moody's noted while Downey's capital ratios "remain high in relation to other U.S. banks," with core and risk-based capital ratios of 7.6% and 14.3% as of June 30, capital "is being quickly eroded by its operating performance."

TheStreet.com Ratings'

financial strength rating

for Downey Savings & Loan is D- (weak).

S&P pointed out that Downey's loan loss reserves "would be considered very strong levels (6.5% of loans plus other real estate owned, and 52% of

nonperforming assets)" under normal conditions, and that the thrift's "capital and reserve levels should allow it to absorb credit losses above even our current pessimistic projections."

However, in light of the continued increase in nonperforming assets that we

discussed here

, S&P speculated that if Downey were to post another net loss like the one it


for the second quarter, the thrift's "well-capitalized" designation could be in jeopardy.

"Although Downey's good funding profile and lack of brokered deposits should limit the direct impact of the thrift having only an 'adequate' regulatory capitalization designation, we are concerned about possible negative fallout affecting Downey's liquidity or regulatory status," S&P said.

After those frightening remarks, S&P expressed confidence that Downey would continue to "maintain adequate risk-adjusted capital measures and good funding and liquidity."

According to Downey S&L's March 31 Thrift Financial Report, uninsured deposits totaled $1.28 billion, or 12% of the institution's total deposits.

Downey is one of several thrifts with mounting loan losses that have been

watched closely by investors

since federal regulators took over of

IndyMac Bancorp

earlier this month.


Washington Mutual

(WM) - Get Report

, was seen shares free fall this week as analysts began to

raised concerns its liquidity



had said WaMu may have

no choice

but to raise more capital -- a somewhat difficult prospect -- if its loan losses

continued to mount


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Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.