MOODY'S DOWNGRADES FREMONT GENERAL CORPORATION; SENIOR DEBT TO Ba1 AND FINANCIAL STRENGTH RATINGS TO Baa1, SUBORDINATED RATING CONFIRMED AT Ba2
Moody's Investors Service has lowered the ratings of Fremont General Corporation and its insurance operating subsidiaries. The following actions were taken: senior debt obligations lowered to Ba1 from Baa3, insurance financial strength ratings of members of the Fremont intercompany insurance pool lowered to Baa1 from A3. Ratings on the subordinated debt instruments and the trust preferred securities were confirmed at Ba2 and "ba2" respectively. In addition, a rating of Ba1 was assigned to the $225 million bank credit facility of Fremont General Corporation. This action concludes a review that began in November, 1999. The outlook for the ratings is stable.
The downgrade largely reflects Moody's concern over the margin of protection afforded to the senior noteholders by the core insurance operating earnings. Although Fremont has realized sizable rate increases in much of its workers' compensation business in the latter part of 1999 and into 2000, these increases are largely necessary to offset the loss of favorable reinsurance terms that have proved beneficial to the company over the past two years (despite recent adverse reserve development). In the near term, despite the cash proceeds from the sale of Fremont Financial, Moody's expects that the insurance earnings will be largely consumed by the interest expense and other cash needs at the parent holding company, thus moderating organic capital growth at the insurance subsidiaries. Moreover, the modest cushion expected to exist between the insurance company's debt servicing capabilities and needs could be adversely impacted by other risks such as additional reserve development.
In addition to the insurance operations, Moody's review consisted of an evaluation of Fremont Investment and Loan (FIL), the company's Thrift and Loan. The earnings and balance sheet growth of this subsidiary have been strong over the past several years. Conservative accounting, strong asset performance, increasing geographic diversification, and a stable retail deposit base are strengths of the organization. These strengths are tempered by its concentration of loans (albeit declining) in California, the subprime nature of its residential loans, and specialty commercial real estate loans. On balance, despite the expectation of slower growth at FIL, Moody's does not view the company as a source of funds to the parent in the near term. As a result, the insurance operations are expected to the primary source of funds for servicing of the debt.
Fremont General, based in Santa Monica, California, is engaged through its subsidiaries in underwriting insurance and in providing diverse financial services to small and medium-sized businesses nationwide. Through its wholly-owned subsidiary Fremont Compensation Insurance Group, it is one of the nation's largest underwriters of workers' compensation insurance. Fremont General's financial services businesses provide residential and commercial real estate lending, and insurance premium financing. Fremont General reported total revenues of $985 million through September 30, 1999, and shareholders' equity of $809 million.
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