DBRS Downgrades The South Financial Group, Inc to CC; Ratings Still Under Review with Negative Implications

DBRS has today downgraded the ratings for The South Financial Group, Inc. (The South or the Company) and its bank subsidiary, Carolina First Bank (Bank), including the Company’s Issuer & Senior Debt rating to CC from B and maintained its Short-term Instruments rating at R-5. At the same time, DBRS is withdrawing the Company’s subordinated debt rating. All ratings remain Under Review with Negative Implications.

The downgrade follows The South’s Q4 2009 operating results, which reflected a loss attributable to common shareholders of $194 million. Furthermore, the Company suspended dividend payments on all remaining outstanding equity and capital instruments, including subordinated debentures to various trusts with applicable outstanding trust preferred securities, REIT preferreds and TARP preferred stock. Although the suspension will preserve $4.5 million in capital on a quarterly basis, the impact on capital will be limited. Indeed, the suspension will further reduce the Company’s financial flexibility as it tries to raise additional capital, especially given its low stock price and the disrupted market, which makes it difficult to sell assets. DBRS notes that The South’s tangible common equity (TCE) position is now at a very low 3.67%. DBRS notes that the inability of The South to augment its capital position within the short term will severely strain its ability to continue operating as a going concern.

At this time, DBRS notes the need to bifurcate the Bank’s senior debt and deposit ratings, in view of the higher expected loss rates for the senior debt holders versus that for uninsured depositors to which the deposit rating applies.

It is DBRS’s perception that substantial amounts of potential losses remain embedded in the Company’s loan portfolios, especially given the low real estate valuations and high unemployment within its geographic footprint. Moreover, the Company’s core earnings capacity (income before provisions and taxes), provides only a modest level of loss absorption capacity, especially when compared to recent quarterly provisions for loan loss reserves, which are likely to remain elevated over the near term. As such, DBRS anticipates capital invasion to continue.

From a regulatory standpoint, the Company is “well capitalized”, as reflected by its estimated Tier 1 and Total risk based capital ratios of 9.93% and 11.24%, respectively. However, DBRS expects regulatory capital to contract over the near term, due to additional quarterly losses. The regulatory capital metrics include $347 million in TARP capital.

At this point, liquidity is not a concern. The Company has excess liquidity, including $200 million in cash at the Federal Reserve and $1.2 billion in unencumbered securities. Furthermore, there is roughly $50 million at the holding company, which could be downstreamed to support the bank.

The Review will continue to focus on The South’s ability to raise additional capital to offset anticipated capital invasion. In DBRS’s opinion, the Company must immediately address its weak TCE ratio, especially since more quarterly losses are likely.

Notes:
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.