DBRS Comments on State Street Corporation’s Capital Raise

DBRS has today commented on State Street Corporation’s announcement of its capital and debt raises along with its voluntary conduit consolidation.

In DBRS’s view, the conduit consolidation is primarily an accounting event as DBRS has been evaluating State Street on a fully consolidated basis since last year. To be clear, the Company’s risk profile remains unchanged after consolidation with the primary difference being that the $22.7 billion in conduit securities move onto its balance sheet. This action precipitates State Street’s marking-to-market its conduit portfolio resulting in a $6.1 billion pre-tax ($3.7 billion after-tax) loss. At May 15, 2009, the vast majority of conduit securities were current in the payment of principal and interest. If the securities perform as expected to maturity, the loss will be gained back through earnings accretion to net interest revenue, which is projected to add $475 million from May 15th through year-end 2009 alone. DBRS is also mindful, however, that the conduit securities, which are of generally lower credit quality than State Street’s legacy investment portfolio, could experience real credit losses on the securities that could reduce the expected earnings accretion.

DBRS views that if successful, the announced $1.5 billion common equity raise and accompanying unsecured Senior debt offering as clearly positive for bondholders. The common equity offering in combination with the TCE improvement plan is estimated to dramatically increase tangible common equity to approximately 4.14% (pro-forma 6/30/09), which is well above DBRS’s current comfort level. The debt offering will also confer more flexibility on the issuer in meeting a key TARP capital payoff requirement.

The Negative trend on the Company’s ratings reflect DBRS’s ongoing concerns that earnings from servicing fees and other revenues are constrained and may further decline due to sustained lower asset values and disrupted capital markets at a time when unexpected expenses are possible and add to earnings volatility. The Company may also be subject to legal and reputational risk or possible business loss from customers in relation to the Company’s role as agent. For example, State Street provided voluntary support at a cost of $450 million (pre-tax) to its SSgA managed Stable Value accounts in the first and fourth quarters of 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.