Standard & Poor's has lowered its counterparty credit rating on Washington Mutual to 'CCC'/'C' from 'BB-'/'B'.

The rating agency also affirmed the 'BBB'-/'A-3' counterparty credit rating on Washington Mutual Bank because of the breadth of its retail franchise.

"The downgrade was due to the increased likelihood that a potential sale of the company may not involve the whole company, which increases the risk of default for holding company creditors," said Victoria Wagner, a credit analyst at the rating agency.

S&P also lowered the preferred stock rating to 'CC' from 'B-'. This reflects the incremental risk of default of these securities. The outlook remains negative.

S&P cited press reports in noting that banking regulators could be intervening in the potential sale of WaMu.

According to the rating agency, depending on how a purchase transaction is structured, it is possible that the company may not be acquired in its entirety. If this happens, S&P said that holding company creditors face losses since the assets at the holding company are not enough to cover the full repayment of the $14.4 billion of rated unsecured debt outstanding, which has amounted to $4.1 billion of senior debt, $1.6 billion of subordinated debt, and $8.65 billion of capital securities.

S&P also noted that WaMu's only operating subsidiary is the thrift. Considering the current stresses facing the broader U.S.-based financial institutions sector, S&P said that the available pool of large bank acquirers that are not capital constrained or devoid of their own mortgage credit stress is quite small, which raises the possibility that the purchase may be only partial.

As of June 30, Washington Mutual Bank had total assets of $307 billion, total deposits of $188 billion, and Tier 1 core capital of $21.2 billion (Tier 1 risk-based capital 8.4% and tangible equity of 7.02%), according to the rating agency.

"We will continue to monitor the developments surrounding WAMU, both in terms of its financial fundamentals and its potential sale and the structure of such sale," analysts said. "We may revise the outlook to developing if we receive more definitive news regarding the final terms of a sales transaction and the potential benefit that Treasury's new bailout plan may offer to WAMU as an independent company."

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