Toronto, October 23, 2019 -- Moody's Investors Service ("Moody's") has today
taken actions on the ratings and assessments of FirstBank Puerto Rico
(FirstBank) and Banco Santander Puerto Rico (BSPR) following the announcement
on 21 October 2019 that First Bancorp, FirstBank's holding company,
would acquire BSPR and its bank holding company Santander Bancorp for
a cash consideration of $1.1 billion. The long-term
ratings and standalone Baseline Credit Assessment (BCA) for FirstBank
were placed on review for upgrade, while its short-term ratings
were affirmed. The long- and short-term ratings and
standalone baseline credit assessment (BCA) for BSPR were placed on review
for downgrade. The transaction, which the banks expect to
close in the middle of 2020 subject to regulatory approval, will
be funded in cash and the price includes a $63 million premium
to BSPR's core tangible common equity. A list of affected
ratings can be found at the end of this press release.
RATINGS RATIONALE
The review for upgrade of FirstBank's assessments and ratings reflects
Moody's view that the BSPR's acquisition will incrementally
improve the diversification of FirstBank's loan portfolio as BSPR's
loan book has a comparably high proportion of commercial real estate loans.
Moody's believes the combined FirstBank-BSPR loan portfolio
will be of higher quality than either existing loan portfolio because
FirstBank is not assuming any of BSPR's non-performing assets.
Moody's also considers that FirstBank's capital will decline
significantly upon completion of the acquisition. FirstBank has
estimated its closing pro-forma common equity tier 1 (CET1) to
risk-weighted assets ratio to be 15.3% compared to
a CET1 ratio of 20.6%, as of 30 June 2019.
The review for downgrade on BSPR's BCA and ratings reflects Moody's
view that the risks for its existing creditors will increase as a result
of the sale as they will no longer benefit from affiliate support from
Banco Santander S.A. (Spain) when the transaction closes.
This is likely to result in a multi-notch downward movement in
all BSPR's long-term ratings, and short-term
ratings, from which they are derived. Moody's currently
aligns BSPR's ratings to those of its ultimate US mainland parent,
Santander Holdings USA, Inc., because of cross-indemnification
provisions of the Federal Deposit Insurance Act. However,
Moody's believes that the likelihood of affiliate support will remain
very high for BSPR's existing creditors until the transaction closes,
after which time cross-indemnification will be removed.
During the review period, Moody's will assess the extent to which
both banks' standalone credit profiles and ratings are affected by this
transaction, including the assessment of potential execution risks
associated with the integration.
Moody's does not have any particular governance concerns for either
FirstBank or BSPR.
What could change the ratings up
FirstBank's b2 BCA could be upgraded if Moody's were to assess a sustainable
improvement in the bank's asset quality profile without unexpected
deterioration in the bank's capital, funding and/or liquidity
profile, upon the close of the transaction. The BCA could
also be upgraded if Moody's were to assess a sustainable improvement
in Puerto Rico's bank operating environment, which it believes would
lead to a reduction in problem loan levels, sustained improvement
in profitability, capitalization and/or liquidity. A higher
BCA would likely lead to a ratings upgrade.
The review for downgrade indicates that rating upgrades are unlikely for
BSPR. If the transaction does not proceed as announced, BSPR's
ba2 BCA could be upgraded if Moody's were to assess a sustainable improvement
in Puerto Rico's bank operating environment, which it believes would
lead to a reduction in problem loans, sustained improvement in profitability
and/or liquidity. BSPR's ratings could be upgraded following an
upgrade of the standalone credit assessment of its affiliate support providers,
which would result in a higher adjusted BCA.
What could change the ratings down
The review for upgrade indicates that rating downgrades are unlikely for
FirstBank. However, FirstBank's BCA could be downgraded if
Moody's were to assess a deterioration in bank operating conditions in
Puerto Rico. It could also be downgraded if Moody's believes the
risk appetite of FirstBank has increased, for example because of
above-peer average loan growth, a notable increase in lending
concentrations, or heightened execution risks from unexpected integration
challenges. Additionally, a sustained, unexpected decrease
in capital could lead to a downgrade in the BCA. A lower BCA would
likely lead to a rating downgrade for FirstBank.
BSPR's BCA could be downgraded if Moody's were to assess a deterioration
in bank operating conditions in Puerto Rico. It could also be downgraded
if Moody's believes the risk appetite of BSPR has increased, for
example because of above-peer average loan growth or a notable
increase in lending concentrations. Additionally, a sustained
decrease in capital could lead to a downgrade in the BCA. BSPR's
ratings could be downgraded following a downgrade of either of its affiliate
support providers and upon close of the transaction (thus eliminating
the cross-indemnification provisions), which would lower
its Adjusted BCA, from which its ratings are derived.
List of affected ratings:
Issuer: FirstBank Puerto Rico
..Review for Upgrade
.Baseline Credit Assessment, currently b2
.Adjusted Baseline Credit Assessment, currently b2
.Long-Term Bank Deposits, currently Ba3, Rating
Under Review; previously Ba3 Stable
.Local Long-Term Counterparty Risk Rating, currently
B2
.Foreign Long-Term Counterparty Risk Rating, currently
B2
.Long-Term Counterparty Risk Assessment, currently
B1(cr)
.Long-Term Issuer Rating, currently B3, Rating
Under Review; previously B3, Stable
..Affirmations
.Short-Term Bank deposits, affirmed at Not Prime
.Local Short-Term Counterparty Risk Rating, affirmed
at Not-Prime
.Foreign Short-Term Counterparty Risk Rating, affirmed
at Not-Prime
.Short-Term Counterparty Risk Assessment, affirmed
at Not-Prime(cr)
..Outlook Actions:
.Outlook, Changed to Rating Under Review from Stable
Issuer: Banco Santander Puerto Rico
..Review for downgrade:
.Baseline Credit Assessment, currently ba2
.Adjusted Baseline Credit Assessment, currently baa1
.Long-Term Bank Deposits, currently A2, Rating
Under Review; previously A2, Stable
.Short-Term Bank Deposits, currently P-1
.Senior Unsecured Bank Note Program, currently (P)Baa1
.Local Short-Term Bank Note Program, currently (P)P-2
.Local Long-Term Counterparty Risk Rating, currently
Baa1
.Foreign Long-Term Counterparty Risk Rating, currently
Baa1
.Foreign Short-Term Counterparty Risk Rating, currently
P-2
.Local Short-Term Counterparty Risk Rating, currently
P-2
.Long-Term Counterparty Risk Assessment, currently
A3(cr)
.Long-Term Issuer rating, currently Baa1, Rating
Under Review; previously Baa1, stable
.Short-Term Counterparty Risk Assessment, currently
Prime-2(cr)
..Outlook Actions:
.Outlook, Changed to Rating Under Review from Stable
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
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.
Jason Mercer
VP-Senior Analyst
Financial Institutions Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
