Reuters logo
Fitch Affirms First Horizon at 'BBB-' on Merger with Capital Bank; Outlook Remains Positive
May 5, 2017 / 8:47 PM / 7 months ago

Fitch Affirms First Horizon at 'BBB-' on Merger with Capital Bank; Outlook Remains Positive

(The following statement was released by the rating agency) NEW YORK, May 05 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of First Horizon National Corporation (FHN) at 'BBB-' following the announcement that FHN will acquire Capital Bank Financial Corp. (CBF). FHN's Rating Outlook remains Positive. A complete list of rating actions follows at the end of this release. Fitch affirmed FHN's IDRs and revised its Outlook to Positive from Stable on Jan. 23, 2017. The transaction is valued at $2.2 billion financed by 80% stock and 20% cash. The deal represents a price-to-tangible book value of 2.0x for CBF, a 2.9% discount based on CBF's share price at the time of announcement. The company expects the deal to be accretive to earnings in 2019 excluding potential revenue synergies and assuming fully phased-in cost saves of $65 million annually. The transaction is expected to close in the fourth quarter of 2017 (4Q17), subject to shareholder and regulatory approvals. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The affirmation reflects Fitch's view that the CBF transaction is in line with Fitch's expectations that FHN would pursue a sizable acquisition in neighboring markets to expand its footprint and scale. This transaction provides some added geographic diversification and incrementally strengthens FHN's franchise in Tennessee. Further, assuming the realization of forecasted costs saves, this acquisition may aid the company's earnings profile. Underlying today's rating action, Fitch expects FHN to maintain capital at the higher end of its targeted ranges. Offsetting this, Fitch views moderate integration risks, and that CBF's through-the-cycle credit quality is untested. In Fitch's view, the transaction marginally enhances FHN's franchise in Tennessee and expands its presence notably into neighboring North Carolina and to a lesser extent Florida which Fitch expects will provide some degree of added geographic diversification. FHN's pro forma loan mix is similar to its current loan mix and Fitch believes CBF's well-diversified, commercially-focused loan portfolio is a good strategic fit for FHN. CBF has grown significantly through a combination of acquisitions and organic growth and as such the bank's through-the-cycle credit quality remains unproven. Fitch views integration risks as moderate due to CBF's acquisitive history although Fitch notes CBF was able to fully integrate their prior acquisitions with no delays. FHN estimates run-rate cost saves of $65 million annually which equates to roughly 30% of CBF's existing core expense base. Fitch believes these cost save estimates could prove difficult to realize due to CBF's already low efficiency ratio of 64% as of 1Q17 and limited branch overlap. However, to the extent that FHN is able to realize the forecasted cost saves from the transaction, Fitch believes FHN's earnings profile could converge with higher-rated institutions which could lead to positive rating momentum over the Outlook horizon. FHN's capital levels will come down from current levels as a result of the transaction. FHN has communicated that it intends to manage its common equity tier 1 (CET1) ratio at 8% - 9% over the longer term. Post-closing, FHN's estimated pro forma CET1 ratio is 9%, down substantially from 10.2% as of 1Q17. Fitch views the increased geographic diversification as somewhat mitigating the reduction in capital. Over time, Fitch expects FHN to manage its capital position to the higher end of its' target range. This expectation is reflected in today's affirmation as well as the Outlook remaining Positive. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES FHN's preferred stock is notched five levels below its VR of 'bbb-', two times for loss severity and three times for non-performance. LONG- AND SHORT-TERM DEPOSIT RATINGS FHN's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY FHN's IDR and VR are equalized with those of First Tennessee Bank, NA, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR FHN has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, FHN is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The Outlook revision to Positive from Stable on Jan. 23, 2017 reflected Fitch's view that there was more upside to FHN's ratings than downside over the following 12-24 months. Given the acquisition announcement, Fitch expects to resolve the Outlook toward the latter part of the outlook horizon to allow time for the results of the transaction to be assessed. Fitch's base case assumption is that FHN will be able to realize the estimated cost saves over the next few years. The Positive Outlook reflects Fitch's view that FHN's earnings profile will converge with higher-rated institutions. Positive rating action is possible if FHN is able to demonstrate higher and more consistent earnings in line with higher rated institutions, measured by return on average assets (ROAA) and/or pre-provision net revenue-to-average assets (PPNR to ROA). However, the Outlook could be revised to Stable from Positive if Fitch believes that FHN will not be able to realize the cost saves and that earnings will continue to lag higher-rated peers. Fitch will continue to monitor asset quality at FHN for signs of deterioration as CBF's loan portfolio has not been tested through a credit cycle. Fitch expects net charge-offs (NCOs) to remain within FHN's normalized operating target range of 20bps-60bps over time. Positive rating momentum is possible if NCOs over time remain within the target range post integration of CBF. Conversely, negative ratings pressures could arise should FHN's asset quality deteriorate more than expected such that earnings and/or capital is adversely impacted. As noted above, Fitch expects FHN will manage its capital position at the higher end of their 8% - 9% CET1 target range. Negative ratings pressure could develop should FHN's CET1 and/or TCE position fall below the estimated pro forma levels. Additionally, negative ratings pressure could develop should management pursue another bank acquisition before CBF is fully integrated into FHN's franchise. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for FHN and its operating companies' preferred stock are sensitive to any change to its VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to FHN's long- and short-term IDRs. HOLDING COMPANY Should FHN's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch the holding company IDR and VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since FHN's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has affirmed the following ratings with a Positive Outlook: First Horizon National Corporation --Long-Term IDR at 'BBB-'; Outlook Positive; --Viability rating at 'bbb-'; --Short-Term IDR at 'F3'; --Senior Unsecured at 'BBB-'; --Preferred Stock at 'B'; --Support rating at '5'; --Support Floor at 'NF'. First Tennessee Bank, N.A. --Long-Term IDR at 'BBB-'; Outlook Positive; --Viability rating at 'bbb-'; --Short-Term IDR at 'F3'; --Long-term Deposits at 'BBB'; --Short-term Deposits at 'F3'; --Senior Unsecured at 'BBB-'; --Short-term Senior Unsecured at 'F3'; --Preferred Stock at 'B'; --Support rating at '5'; --Support Floor at 'NF'. Contact: Primary Analyst Michael Shepherd, CPA Associate Director +1-212-908-9138 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below