RPT-Moody's may cut WaMu debt into junk territory

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NEW YORK, July 22 (Reuters) - Moody's Investors Service on Tuesday said it may cut its ratings on Washington Mutual Inc's WM.N senior unsecured debt into junk territory, after the largest U.S. savings and loan posted a $3.33 billion second-quarter loss.

The net loss equaled $6.58 per share as souring mortgages forced it to set aside more money for loan losses. For details, see [ID:nN22322548]

"WaMu's asset quality issues primarily relate to the company's residential mortgage portfolio, but deterioration is also being experienced in the company's credit card portfolio," Moody's said in a statement.

"To establish the necessary provisioning for this asset quality deterioration, Moody's expects WaMu to record sizable quarterly losses through 2009," the rating agency said.

Moody's said it may cut WaMu's unsecured debt into junk territory, from "Baa3," the lowest investment grade.

WaMu has sufficient liquidity, with its debt maturities in 2008 and 2009 limited and its cash balances sufficient to cover holding company cash needs through 2009, Moody's said.

However, "WaMu's financial flexibility has been reduced due to the significant decline in its market value -- it is trading at a substantial discount to book value -- and a decline in balances of certain deposit categories in the second quarter of 2008," Moody's said.

It would be expensive, at best, for WaMu to raise new equity capital or issue new debt given the market's current negative opinion of the company, Moody's said. "This reduced financial flexibility makes it more difficult for the company to successfully navigate through unanticipated events."

The cost to insure WaMu's debt with credit default swaps fell to 740 basis points after the earnings, or $740,000 per year for five years to insure $10 million in debt, from 785 basis points earlier on Tuesday, according to Phoenix Partners Group. (Reporting by Karen Brettell; Editing by Leslie Adler)