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Rating Action:

Moody's affirms ratings of Schwab and TD Ameritrade, outlooks remain stable

26 Nov 2019

New York, November 26, 2019 -- Moody's Investors Service ("Moody's") today affirmed the ratings of The Charles Schwab Corporation (Schwab, A2 senior) and TD Ameritrade Holding Corporation (TD Ameritrade, A2 senior). The rating outlook for both firms remains stable.

A list of affected ratings is available at the bottom of this press release.

RATINGS RATIONALE

The rating action follows Schwab's announcement that it has agreed to acquire TD Ameritrade in an all stock transaction valued at approximately $26 billion. The rating affirmation for Schwab reflects the improvements to Schwab's pre-tax margin and debt service metrics which should result if the firm is able to successfully realize the cost and revenue synergies associated with the transaction, offset by the sizeable integration costs which the combined firm will incur as well as the operational and cultural challenges which the firm will face during the three year integration period.

Moody's noted that the acquisition of TD Ameritrade will add to Schwab's already significant scale advantages in the wealth management business. If the merger integration is successful, the rating agency believes that over the longer-term Schwab's credit profile could benefit significantly from its enlarged scale as well as the increased earnings it should realize on TD Ameritrade's client cash balances under its own cash deposit sweep programs. However, over the next three years the firm will face significant execution risk on a merger of unprecedented size for the firm.

The stable outlook reflects Moody's view that on balance these credit considerations largely offset each other over the near to medium term. The stable outlook also reflects positive governance considerations. In particular, the stable outlook incorporates Schwab's continued adherence to conservative financial policies, as reflected in the all-equity funding structure of the transaction, which helps offset the heightened integration risk posed by such a large transaction. Schwab's ratings reflect these governance considerations as a positive corporate behavior adjustment in the standalone assessment of Schwab's creditworthiness.

TD Ameritrade's senior unsecured debt rating and issuer rating are at the same level as the same ratings for Schwab. Moody's expects that following completion of the acquisition TD Ameritrade's outstanding debt will become direct obligations of Schwab. The rating affirmation of TD Ameritrade's ratings as well as the stable outlook for TD Ameritrade reflects this expectation.

Moody's ratings for TD Ameritrade currently incorporate one notch of uplift reflecting the rating agency's view that TD Ameritrade's credit profile benefits from a moderate likelihood of support from TD Ameritrade's largest shareholder, The Toronto-Dominion Bank ((Aa1 stable, a1 BCA), given its 43% ownership stake, long-term strategic relationship and close management integration. While Moody's believes that likelihood of support remains unchanged as long as TD Ameritrade remains independent, following completion of the deal Moody's believes that the likelihood of support from Toronto Dominion Bank for the combined firm would be low. This reflects Toronto-Dominion's more modest ownership stake of approximately 13% in the combined firm (9.9% voting interest), its smaller representation on the combined firm's board, and the rating agency's expectation that over time more of TD Ameritrade's client cash balances will be deposited at Schwab's bank subsidiaries instead of at TD Bank USA.

WHAT COULD CHANGE THE RATING UP/DOWN

For Schwab, if the firm is able to sustain its pre-tax margin over 42%, its debt to EBITDA on a Moody's adjusted basis below 1.7x, and its retained cash flow less capex above 30% of adjusted debt, while also maintaining a conservative asset risk appetite, sustaining recent market share gains, and successfully complying with the Federal Reserve's enhanced prudential standards, its ratings could be upgraded. A significant deviation from the firm's conservative financial policy or its long-term business strategy, a meaningful decline in pre-tax margins or debt service capacity, an increased asset risk appetite, or a significant loss of customers or deterioration in franchise value, via a security breach of customer accounts, sustained service outage or systems failures, or a significant legal or compliance issue, could lead to a ratings downgrade.

For TD Ameritrade, if the acquisition is completed as proposed, the direction of its ratings will be driven by the considerations regarding Schwab's ratings noted above. If the acquisition is not completed as proposed, then a sustained focus on organic growth, with increased diversification of the company's revenue base beyond client trading and bank deposit account fee revenue, a sustainable pre-tax margin over 45% while maintaining a conservative financial policies including debt to EBITDA on a Moody's adjusted basis below 1.3x, and retained cash flow less capex above 30% of adjusted debt could lead to an upgrade of TD Ameritrade's ratings. Alternatively, an increase in debt to EBITDA to over 2x absent a coherent near-term deleveraging strategy, a decline in the firm's pre-tax margin to 30% or lower, a permanent loss of a significant share of order routing revenue absent alternative means of generating income from client order flow, or a significant deterioration in franchise value via a security breach of client accounts, a sustained service outage, or a significant legal or compliance issuer could result in a downgrade.

The principal methodology used in these ratings was Securities Industry Service Providers Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Outlook Actions:

..Issuer: Charles Schwab Corporation (The)

....Outlook, Remains Stable

..Issuer: TD Ameritrade Holding Corporation

....Outlook, Remains Stable

Affirmations:

..Issuer: Charles Schwab Corporation (The)

....Subordinate Medium-Term Note Program, Affirmed (P)A3

....Senior Subordinate Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

....Subordinate Shelf, Affirmed (P)A3

....Senior Unsecured Shelf, Affirmed (P)A2

....Pref. Shelf Non-cumulative, Affirmed (P)Baa2

....Pref. Stock Non-cumulative, Affirmed Baa2 (hyb)

....Senior Unsecured Commercial Paper, Affirmed P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: TD Ameritrade Holding Corporation

.... Issuer Rating, Affirmed A2

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

....Senior Unsecured Shelf, Affirmed (P)A2

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Fanger
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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