S&P Downgrades Indymac to Junk

Standard & Poor’s said Tuesday that it cut its rating on Indymac Bancorp to junk, including lowering the counterparty credit rating on Indymac to ‘BB+/B’ from ‘BBB-/A-3′ — the ‘BB-plus’ rating is S&P’s highest junk rating. The agency also said the Pasadena, Calif.-based thrift remains on negative ratings watch, meaning another rating downgrade is possible within two years.

“This action was taken in response to concerns about Indymac’s exposure to deteriorating housing markets and the effect credit losses will have on capital levels. The company has announced that continued credit performance deterioration will result in a loss for the fourth quarter,” said credit analyst Robert B. Hoban, Jr.

Indymac CEO Mike Perry said in a statement on IndyMac’s corporate blog on December 5th that the company now expects losses to continue into the first half of 2008.

S&P said it expects fourth-quarter nonperforming assets (NPAs) to increase materially on both a percentage and dollar basis from third quarter’s “already very high” 3.65 percent of total loans.

From the press statement:

A large portion of Indymac’s nonperformers is in higher risk mortgage products that it all but stopped originating earlier in 2007. However, credit performance of the core alt-A portfolio has also deteriorated to higher-than-normal levels. Historically, Indymac would sell off most of its originations of higher risk products, but with the secondary loan and securitization markets for these products all but shut down, Indymac had accumulated $366 million of NPLs in its held-for-sale portfolio, in addition to $463 million of other NPAs as of Sept. 30, 2007.

Indymac spokesperson Grove Nichols downplayed the ratings downgrade, saying “the lowering of our ratings should have no practical impact on Indymac’s business, as we are not reliant on market-based borrowings to fund ourselves.” Nichols cited the thrift’s access to FHLB advances and depository funding as its primary sources of liquidity, saying the bank had increased liquidity to a record $6.3 billion at the end of the second quarter.