Moody’s Investors Service has placed the long-term ratings of the Bear Stearns Companies Inc. and its subsidiaries on review for possible downgrade.
The rating action is in response to Bear’s announcement that the firm expects to post a net loss in the fourth quarter resulting from US$1.2 billion in net market-valuation losses on its exposures to subprime mortgage-related assets and CDOs. The loss will follow on the heels of weak third quarter earnings.
As a result of the recent write-downs and hedges on its subprime and ABS CDO positions, Bear’s remaining exposure to these asset types includes a net long position of US$884 million in ABS CDOs and a US$52 million net short position in subprime mortgages, Moody’s notes. Although the rating agency expects that these specific assets will pose only modest downside risk, during its review Moody’s will evaluate Bear’s firm-wide exposures and valuations in other asset classes, including Alt-A residential mortgages, commercial real estate and CMBS.
“Bear’s performance through the market inflection and dislocation has been more challenged than at some competitors, and reflects not only tough markets, but certain risk and strategic decisions made by the firm,” said Moody’s senior vice president, Blaine Frantz. This includes the decision to extend financing to one of its in-house structured products hedge funds, which increased Bear’s on-balance sheet exposure to these problematic assets and ultimately contributed to the write-downs.
Though Bear has improved its earnings diversification over the past five years, its level and scale of product and geographic diversification still lag that of peers and has not provided a sufficient buffer to offset write-downs in mortgages and leveraged lending, it added.
Also as part of the review, Moody’s will assess the earnings prospects for Bear’s various business lines. Looking into 2008, Moody’s expects that Bear’s core earnings generation will continue to prove challenging. Moody’s noted, however, that despite being overshadowed by the current challenges in its mortgage business, Bear possesses solid customer-flow franchises in a number of other fixed income businesses, has a solid and well-performing secondary equities platform, and has a consistent profit generator in its global clearing and prime brokerage operation. Though not as large as those of its principal competitors, Bear’s investment banking unit is consistently profitable and well-positioned with key clients within its chosen industry groups, Moody’s said.
Moody’s considers downgrade for Bear Stearns
Investment bank forecasts Q4 loss of US$1.2 billion
- By: James Langton
- November 15, 2007 November 15, 2007
- 11:15