DBRS Downgrades Colonial BancGroup, Inc.; Places Ratings Under Review with Negative Implications

DBRS has today downgraded most ratings for Colonial BancGroup, Inc. (Colonial or the Company), and its related entities, including Colonial’s Issuer & Senior debt rating to B (high) from BB (low) and its bank subsidiary, Colonial Bank, N.A.’s (Bank) Deposits and Senior Debt rating to BB (high) from BBB (low). Colonial’s short-term rating was confirmed at R-4. All ratings have been placed Under Review with Negative Implications.

The rating action today reflects DBRS’s view that Colonial did not meet our expectations by successfully receiving a $300 million capital infusion from private investors by the end of Q1 2009. While the Company did enter into a definitive agreement with various investors led by Taylor, Bean and Whitaker Mortgage Company to raise the $300 million, Colonial does not have the actual investment yet and the deal is subject to numerous conditions. As such, the Company was not able to boost its bank regulatory capital ratios by quarter-end, as required in its informal bank memorandum of understanding. Indeed, it is possible that regulators could now take more formal actions, which could possibly further limit Colonial’s financial flexibility.

DBRS notes that the signed definitive agreement to receive $300 million in equity from a group of investors was certainly a step in the right direction. However, the deal is subject to several conditions, some of which are out of Colonial’s control. These conditions include the requirement that investors receive confirmation that the U.S. Treasury will invest funds in the Company through the TARP Capital Purchase Program. Additionally Colonial now requires numerous regulatory approvals, investors need to obtain necessary financing, the bank requires approval to convert to a federal savings and loan association, investors need to become satisfied that their investment does not trigger a “change in control” for accounting purposes and that the Company will not be required to mark its balance sheet to current market prices. DBRS comments that the investment from the Treasury was originally conditioned upon the Company raising the additional $300 million. However, DBRS notes that Regulators have an incentive to close the deal, as the alternative would likely be more expensive.

In DBRS’s opinion, the inability of Colonial to obtain additional capital will severely limit its ability to absorb future credit costs and other unforeseen charges. DBRS comments that the Company’s asset quality remains under extreme pressure, especially given its substantial troubled Florida-based construction and development portfolio. It is anticipated that Colonial’s capital will remain under significant pressure during 2009, given the deepening recession and severe downturn in the housing market. With the deteriorating economy yet to stabilize, DBRS anticipates sizeable additional provisioning during H1 2009.

DBRS notes that positive ratings actions may occur if Colonial successfully secures the additional capital. Conversely, the inability of Colonial to obtain the capital, would likely lead to a multiple-notch downgrade. Moreover, DBRS will continue monitoring the Bank’s ability to protect its deposit franchise, which is an underlying factor in the ratings.

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.