March 1, 2012 / 8:11 PM / 5 years ago

TEXT-S&P affirms Raymond James 'BBB/A-2' ratings

 (The following statement was released by the rating agency)	
Overview	
  -- Raymond James Financial recently raised $358 of equity capital and 	
$350 million of debt proceeds as part of its plan to finance the acquisition 	
of Morgan Keegan from Regions Financial and will issue approximately $250 	
million more of senior unsecured debt to complete the financing. 	
  -- Management has taken important initial steps to integrate Morgan 	
Keegan's businesses and has earmarked money to retain significant retail 	
revenue producers from Morgan Keegan's broker-dealer and municipal finance 	
businesses.	
  -- We are affirming the ratings, including the 'BBB/A-2' counterparty 	
credit ratings, on Raymond James and removing them from CreditWatch with 	
negative implications. 	
  -- The negative outlook reflects the risk of lower-than-expected revenue 	
if broker retention is lower than projected, if financial services activity 	
slows during a period of higher operating costs, or if the residual exposure 	
to lawsuits due to Morgan Keegan's problem assets becomes costly.	
	
Rating Action	
On March 1, 2012, Standard & Poor's Ratings Services removed its 'BBB/A-2' 	
long- and short-term counterparty credit ratings and 'BBB' senior unsecured 	
debt rating on Raymond James Financial Inc. from CreditWatch, where they
were placed with negative implications on Jan. 12, 2012. At the same time, we 	
affirmed the ratings. The outlook is negative.	
	
Rationale	
We removed our ratings on Raymond James from CreditWatch with negative 	
implications because we believe the company's management has taken the initial 	
steps to integrate Morgan Keegan's businesses. (Raymond James agreed to 	
acquire Morgan Keegan and related affiliates from Regions Financial Corp. for 	
$930 million in January 2012.) Raymond James has appointed several Morgan 	
Keegan executives it deems critical to management positions and has earmarked 	
$140 million for retention payments to significant financial Morgan Keegan 	
retail revenue producers. Total retention will be approximately $215 million, 	
which includes $60 million-70 million of restricted stock units (RSUs) to 	
other employees. We view these steps as positive factors in our analysis of 	
business risk that will help Raymond James to maintain and increase its market 	
position.	
	
Following the transaction, Raymond James' financial profile will weaken 	
relative to fiscal 2011 and first-quarter 2012. Corporate debt outstanding 	
will roughly double to $1.21 billion from the current $607 million. Debt could 	
reach as high as $1.4 billion if Raymond James exercises its right to access 	
seller financing and draws down on a $200 million facility that Regions is to 	
provide prior to closing. Our analysis and financial calculations assume $800 	
million of debt is added to the balance sheet along with $358 million of 	
equity raised in February 2012. The purchase price of $930 million represents 	
approximately a $230 million premium to Morgan Keegan's tangible book value. 	
Therefore, the positive impact of Raymond James' equity raise is somewhat 	
offset by its use to fund intangible asset value. This is a negative in our 	
analysis of the company's financial profile.	
	
In our pro forma analysis using first-quarter 2012 financials, adjusted total 	
equity (ATE) of approximately $2.9 billion will support adjusted net assets 	
(ANA) of approximately $18.9 billion, which results in an ANA-to-ATE ratio of 	
approximately 4.5x. This ratio is down slightly from 7.0x in 2008 and reflects 	
bank balance sheet shrinkage to about $9 billion from $11.4 billion. The 	
ANA-to-ATE ratio remains within our financial profile assumptions for the 	
'BBB' issuer credit rating on Raymond James.	
	
In our view, two key clear risks and one less clear risk remain. Raymond James 	
is weakening its financial profile with its integration of Morgan Keegan, and 	
its ability to reduce balance sheet leverage will depend heavily on broker 	
retention and revenue productivity in 2012 and 2013. Our analysis indicates 	
that Raymond James' financial profile continues to support the current 	
ratings. However, the company is taking on a massive integration unlike any in 	
its recent past. Raymond James' ability to succeed depends highly on 	
successful integration of its management teams and brokerage efforts. Raymond 	
James' risk with less clear implications is legal and financial risk 	
associated with some of Morgan Keegan's assets. We understand that an 	
indemnification from Regions Financial addresses the legal risk associated 	
with Morgan Keegan's inherited assets, such as auction-rate securities. The 	
addition of Morgan Keegan's private equity assets slightly lowers the overall 	
liquidity of the assets on Raymond James' balance sheet. The addition of 	
Morgan Keegan's auction-rate securities and private equity assets contribute 	
to our negative outlook because they could become a possible drain on earnings 	
or capital.  	
	
Standard & Poor's ratings on Raymond James reflect the company's solid 	
franchise in multiple businesses, flexible cost base, and fairly conservative 	
financial profile with good liquidity and capital. We also view Raymond James' 	
recent approval as a regulated bank holding company as a positive development 	
because it will add to operational oversight. Offsetting these strengths are 	
Raymond James' dependence on the highly cyclical retail brokerage business and 	
the risk associated with independent contractor compliance with company 	
business policy. Asset quality risk remains in the bank subsidiary's loan 	
portfolio, in our view, despite lower-than-expected losses. 	
	
Outlook	
Our negative outlook primarily reflects the risks of business integration 	
problems and lower-than-anticipated revenue due to poor broker retention. In 	
addition, potential exposure to losses from lawsuits and an increase in 	
illiquid assets as part of a more highly leveraged balance sheet leave less 	
room for a decrease in revenue if financial services activity slows in 2012 	
and 2013. We could lower the rating if the balance sheet materially weakens, 	
as measured by average net assets to adjusted total equity rising to more than 	
9.0x. We are unlikely to upgrade Raymond James while it integrates Morgan 	
Keegan. We could consider raising the ratings if Raymond James significantly 	
increases capital, lowers balance sheet leverage, and remains 	
"well-capitalized" (according to bank regulatory capital standards) now that 	
it's a regulated bank holding company. 	
	
Related Criteria And Research	
  -- Raymond James Financial Inc. 'BBB' Ratings Placed On CreditWatch 	
Negative, Jan. 12, 2012 	
  -- Raymond James Financial Inc., Dec. 29, 2011	
  -- Raymond James Financial Inc. Outlook Revised To Stable; 'BBB' Rating 	
Affirmed, Nov. 22, 2011	
  -- Rating Securities Companies, June 9, 2004	
	
Ratings List	
	
Ratings Affirmed; CreditWatch/Outlook Action	
                                     To                 From	
Raymond James Financial Inc.	
 Counterparty Credit Rating             BBB/Negative/A-2   BBB/Watch Neg/A-2	
 Senior Unsecured                       BBB                BBB/Watch Neg	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.	
	
 (New York Ratings Team)	
 

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