Moody's Investors Service last week downgraded the senior debt ratings of Bank of America Corp. to Aa2 from Aa3 and Wells Fargo & Co. to Aa3 from Aa1 after both banks earlier this month completed major acquisitions. Both ratings have negative outlooks.

In addition, Moody's upgraded the companies acquired by Bank of America and Wells Fargo to match their level. Moody's upgraded Wachovia Corp., acquired by Wells Fargo, to Aa3 from A1, and Merrill Lynch & Co.., acquired by Bank of America, to Aa3 from A2.

The acquisitions could help lower the borrowing costs for municipal issuers with debt backed by the acquired companies.

Moody's said Wells Fargo's purchase "significantly weakened" the company's capital position and that its "leverage will not improve before 2010." Bank of America and Merrill Lynch face challenges with a difficult economic environment and from having to integrate their various functions, according to Moody's.

Standard & Poor's earlier last week raised the long-term counterparty credit rating on Wachovia to AA from A-plus and the counterparty credit rating on Merrill to A-plus from A. Standard & Poor's late last month downgraded 11 financial institutions, including Wells Fargo and Bank of America, as a result of complex financial risks and the weakening economy.

In addition, Standard & Poor's last week downgraded the long-term rating of PNC Financial Services Group to A from A-plus followings its acquisition of National City Corp., which was upgraded to A from A-minus. The agency cited concerns over the deterioration in the mortgage and housing sectors, to which National City has significant exposure.

"The rating actions incorporate PNC's acquisitions of NCC and our concerns regarding the size of the transaction, which comes amidst the current credit crisis, the incremental exposure to the residential mortgage-related loans in some of the weaker banking markets in the Midwest and Florida, and the external operating environment that presents significant challenges for all banks' financial performance," Standard & Poor's credit analyst John K. Bartko said in a statement.

Bank of America, Wachovia, Wells Fargo, and PNC all rank among the top letter-of-credit providers in the municipal market. The ratings on their bank subsidiaries - which issue the LOCs - are higher than those of the parent companies.

Despite the downgrades, the acquisitions have not had much impact on debt that trades with letters of credit from the acquiring companies, according to Alpine Funds senior portfolio manager Steven Shachat. This is likely because the short-term ratings remain high and the changes to the long-term ratings were not "earth-shattering enough" moves, he said.

On the other hand, the acquisitions have helped issuers with debt backed by the acquired companies, Shachat said. For issuers with debt backed by those three companies, "borrowing costs have just gone down dramatically as a result of the mergers," he said.

"From an issuer's point of view, it has been a grand-slam to be the least," Shachat added. "From a holders' point of view, I get it was to be expected."

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