First Republic Bank’s debt cut to junk by Moody’s

Moody’s Investors Service downgraded its credit rating on First Republic Bank to junk late Friday, citing a “deterioration of the bank’s financial profile.”

First Republic FRC,
the debt rating was cut to B2 from Baa1, Moody’s said. Fitch Ratings and S&P Global Ratings downgraded First Republic Bank’s debt earlier this week.

The downgrade reflects “the deterioration in the bank’s financial profile and the significant challenges First Republic Bank faces over the medium term in light of its increased reliance on short-term and higher-cost wholesale funding due to deposit outflows,” Moody’s analysts said in a statement.

They cited various recent developments with First Republic, including the company’s disclosure Thursday that its Federal Reserve borrowings over the previous week ranged from $20 billion to $109 billion. Also on Thursday, the bank received a deposit of $30 billion from 11 major US banks.

“Moody’s believes that the high cost of these loans, combined with the high proportion of fixed-income assets at the bank, is likely to have a large negative impact on First Republic’s core profitability in the coming quarters,” the analysts said. “Additionally, the rating agency noted that while news of the bank consortium’s deposits is positive in the short term, the long-term path for the bank back to sustained profitability remains uncertain.”

First Republic is reportedly looking to raise money from other banks or private equity firms by selling additional shares, according to the New York Times.

The company’s shares have fallen 80% since the close of trading on March 8, just before Silicon Valley Bank spooked investors with an update on its business and a planned stock sale. First Republic lost 33% in Friday’s session despite the deposit arrangement with the major banks. Shares fell another 6% in the extended session on Friday.

Moody’s said its outlook was maintained at “rating under review.” This downgrade review, it said, “reflects the continued challenges to the bank’s medium-term credit profile in light of its significantly eroded deposit base, increased reliance on short-term wholesale funding and significant amounts of unrealized losses on its investment securities.”

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