Standard & Poor's Tuesday dropped Bank of America Corp. to A from A-plus, citing economic weakness that will put more pressure on earnings than the agency expected when it downgraded the company in December. The rating outlook remains negative.

Standard & Poor's also affirmed the A-1 short-term rating of Bank of America Corp. while lowering the long-term credit ratings of its bank subsidiaries to A-plus from AA-minus and the short-term ratings to A-1 from A-1-plus.

The downgrade did not have much of an impact on the trading of paper with Bank of America letters of credit, market participants said. The bank was the top LOC provider last year, wrapping 240 issues with a par value of $16.1 billion, according to Thomson Reuters.

Bank of America retains a first-tier short-term rating, noted Alpine Funds senior portfolio manager Steve Shachat. Still, "it is moving up very quickly on the radar screen of portfolio managers and analysts," he said. "It will certainly be watched much more closely than it ever has before."

When Standard & Poor's downgraded Bank of America Corp. to A-plus in December, it said it "expected earnings to be 50%-75% of the normal run rate of about $20 billion." This appears less likely following the fourth-quarter results posted by Bank of America and Merrill Lynch & Co., which the company agreed to acquire last year.

Bank of America reported a fourth-quarter net loss applicable to common shareholders of $2.39 billion. Merrill Lynch, whose financial condition deteriorated rapidly in December, reported a fourth-quarter loss of $15.31 billion. Bank of America ended up receiving assistance from the federal government - including an additional $20 million capital injection - to help it complete the acquisition.

Standard & Poor's said its ratings on Bank of America "consider a material weakening in the operating environment leading to declines in earnings." Further writedowns related to Merrill Lynch and Countrywide, which the Bank of America acquired last year, are also a possibility, the rating agency said.

Its current rating expects a "break-even performance," but earnings could be worse than expected, which could lead to further government assistance, Standard & Poor's said. More pressure on common equity levels could lead to further downgrades, it added.

The firms have trimmed their municipal staffs in recent months as they combine their operations. In December, Merrill Lynch's chairman of municipal markets, John Lawlor, was named as head of the combined muni operations.

The firms' ultimate goal is to reduce the tax-exempt group headcount by about 40%, according to public finance sources citing internal speculation, The Bond Buyer has reported.

Shares of Bank of America fell 1.37% yesterday to $3.59 on a day with gains for the market. The stock sits well below its 52-week high of $43.46.

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