(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)