Debt rating of MNC may be upgraded Fed is 'supportive' of NationsBank deal

July 21, 1992|By David Conn | David Conn,Staff Writer

Three of the nation's credit-rating houses have smiled on the NationsBank-MNC Financial deal announced last week by saying they will review the ratings on MNC's debt with an eye toward a possible upgrade.

If the Baltimore-based company's debt is upgraded, MNC Financial Inc. would save money by paying lower interest rates on any new debt it issues. MNC, along with its primary subsidiaries, Maryland National Bank and American Security Bank in Washington, have about $1 billion of outstanding debt.

But any change in debt ratings, like the NationsBank Corp. deal -- a "stakeout merger" that calls for the Charlotte, N.C.-based company to make an initial $200 million investment in MNC -- depends on a favorable finding from regulators.

If approval of the deal and the $200 million come through, NationsBank will have a five-year option to acquire the rest of MNC for a price that would increase over the five-year period. If the acquisition took place now, it would be worth about $1.24 billion.

The credit-rating agencies Moody's Investors Service, Standard & Poor's Corp. and Duff & Phelps announced late Friday that they would take a look at MNC's debt ratings.

An upgraded rating would mean the rating agencies believe MNC, which has about $16.6 billion in assets, is more likely to repay its debt than it was before and could therefore pay a lower interest rate to future lenders.

Standard & Poor's said it has already changed the "outlook" on MNC's debt ratings from "negative" to "developing" and that it expects to change it again to "stable" if the $200 million comes through.

The outlook indicates what direction, if any, a change in debt ratings might take in the next few years, said Bob Swanton, a Standard & Poor's director.

A stable outlook, Mr. Swanton said, would imply little chance of a change in the rating and that the negative outlook warned of a possible downgrade.

Moody's went a bit further, saying it had placed MNC's debt ratings under review for "possible upgrades," again depending on whether the NationsBank investment comes through.

Duff & Phelps placed the debt of MNC and its subsidiaries on a favorable ratings watch.

The companies cited the flexibility that the $200 million would give MNC in its day-to-day lending operations and in its ability to dispose of troubled assets.

For MNC bondholders, a higher debt rating would boost the value of the corporate bonds they hold.

An upgrade would change the amount a bondholder would receive by selling the bond today but would not affect the total return or the amount the bond would pay if held until maturity.

But the credit reviews depend on whether the $200 million investment comes through, and that is contingent on a finding by the Federal Reserve Board that NationsBank's agreement to buy MNC preferred stock that could be converted into common stock worth 16 percent of the company would not end up giving the banking company direct or indirect control over MNC.

If the Fed rules that NationsBank's investment would give it control over MNC, it could require the North Carolina company, the nation's fourth-largest banking company, to file an application to acquire MNC.

Short of an outright acquisition, a finding of control could deem NationsBank a "source of strength," which could require it to provide money to shore up the Baltimore-based company's financial condition.

"They do not want to take on at this point in time the full responsibilities" of control over MNC, which is struggling to dispose of its $1.4 billion portfolio of non-performing assets, pointed out Don Kline, associate director of the Federal Reserve's division of banking, supervision and regulation.

NationsBank and MNC said last week that they hope to have the first phase of their deal consummated by Sept. 30, given regulatory approval.

The Fed's Mr. Kline said that deadline is "not unreasonable if everything flows properly."

MNC Chairman Alfred Lerner and NationsBank President and Chief Executive Officer Hugh L. McColl Jr. said Friday that federal regulators were "supportive" of the proposed deal in concept.

Mr. Kline called that characterization "not out of line."

"The federal regulators are always supportive of a concept that permits a company that is working out its troubles to get an investment" of the size NationsBank has proposed, Mr. Kline explained.

He said the support for the initial investment does not necessarily imply federal regulators' support for the full merger.

He also declined to comment on Mr. Lerner's pending request for a two-year extension of the policy that allows him to remain chairman of both MNC and MBNA Corp., the Delaware-based credit card company that MNC spun off last year to raise much-needed capital.

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