CHICAGO & NEW YORK - (Business Wire) Fitch Ratings has affirmed the following ratings of CapitalSource, Inc. (NYSE:CSE):
--Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured 'BBB-'.
--Senior subordinated 'BB+'
The Rating Outlook is Stable. Approximately $800 million of debt is affected by this rating action.
The ratings affirmation follows CSE's recent announcement to form a de novo California-chartered industrial bank in connection with an asset purchase agreement with Fremont Investment & Loan (FIL). Under the terms of its agreement with FIL, CSE will assume $5.6 billion of retail deposits and acquire 22 retail banking branches from FIL, $3.0 billion of cash and a participation interest in a commercial real estate loan with a principal balance of approximately $2.7 billion as of March 31, 2008.
Fitch views this transaction as neutral to CSE and recognizes that this transaction reflects the company's plan to secure access to deposit-based funding that would further diversify its funding platform. Furthermore, CSE has structured this transaction in a way that strongly insulates itself from the contingent liabilities of FIL and Fremont General Corp. Fitch's rating concerns specific to the transaction center on management's inexperience with operating a regulated entity and reduced financial flexibility associated with maintaining both regulatory capital and REIT dividend payout requirements.
Although CSE's recent overall operating performance remains good and reflects the underlying performance of the portfolio, portfolio performance through weak or recessionary economic conditions remains relatively uncertain. Any significant deterioration in operating performance or credit quality trends would represent rating concerns. Furthermore, Fitch expects that recent management actions will begin to reduce hedging-related losses which have been recognized as a result of GAAP requirements.
These hedges require mark-to-market accounting; however, the corresponding asset or liability is not accounted for on a mark-to-market basis. Continued recognition of sizeable mark-to-market losses would generate negative pressure on the current rating.
Fitch believes that CSE's current capital, liquidity and leverage continue to support the current ratings and Outlook. Fitch is aware that management intends to utilize higher leverage within the industrial bank. Fitch remains comfortable with management's plan to maintain prudent leverage and capitalization. Fitch intends to review the proposed changes in capital structure resulting from the creation of the industrial bank, assess the relative risk of the portfolio assets that support unsecured debt and ensure that overall leverage and capitalization remain appropriate for the current rating level.
Based in Chevy Chase, Maryland, CapitalSource operates as a real estate investment trust (REIT) and, via its commercial loan and investment and residential mortgage investment businesses, provides senior and subordinated commercial loans, engages in asset management and servicing activities, invests in real estate and residential mortgage assets.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
William A. Artz, 312-368-3178, Chicago
Meghan Crowe, CFA, 212-908-9121, New York
or
Media Relations:
Kenneth Reed, 212-908-0540, New York
