OREANDA-NEWS. Fitch Ratings has placed the long- and short-term Issue Default Ratings (IDRs) of First Niagara Financial Group (FNFG) and First Niagara Bank on Rating Watch Positive following its announcement that it will be acquired by KeyCorp. Concurrent with this action, Fitch has affirmed the L-T and S-T IDRs of KeyCorp (Key), and Key Bank, N.A. and revised the Rating Outlook to Negative from Stable. A complete list of rating actions follows at the end of this release.

The transaction is valued at $4.1 billion with 80% stock and 20% cash. The deal represents a price-to-tangible book value of 1.7x with a core deposit premium of 6.7% for FNFG. The deal is expected to be accretive to KEY's earnings in 2018 with an estimated increase that would return tangible common equity to 200 basis points (bps), improvement to cash efficiency of 330bps and EPS accretion of 5%. The transaction is expected to close in the third quarter of 2016 (3Q16), subject to regulatory approval, at which point Fitch will resolve the Rating Watch Positive on First Niagara.

KEY RATING DRIVERS
IDRS, Viability Ratings (VRs)

Fitch's affirmation of Key reflects our view that the FNFG transaction will strengthen KEY's franchise in key markets. Post-closing, KEY would have an improved and strong market position in upstate NY as well as other key markets. Additionally, the FNFG franchise has a strong retail deposit base which is currently undervalued given the low rate environment and excess liquidity in the market. KEY's projected improvements to its efficiency ratio and pre-tax-cost saves of $400 million are also viewed positively. Further, KEY's pro-forma CET1 ratio of 9.5% is considered appropriate given the risk profile of the combined entity. KEY will need to successfully complete some balance sheet restructuring including the disposition of FNFG's $4 billion credit securities. Mitigating factors are KEY's credit mark of 3% on the loan portfolio which combined with the projected capital position should support credit deterioration and potential write-downs from the investment portfolio.

The Negative Outlook reflects Fitch's view that integration and execution risks are high given that FNFG has been an acquisitive bank and has undertaken significant investment to improve its infrastructure. Thus, Fitch views integration risk to be higher as KEY assesses and transitions FNFG's technology and infrastructure to its own platform.

Fitch also believes execution risks are higher given the size of this acquisition and KEY's limited experience. Although FNFG's balance sheet is modest in complexity, KEY lacks a proven track record of successful acquisitions. Fitch's previous press release for KEY (dated Oct. 5, 2015 and available at www.fitchratings.com) highlighted that KEY's ratings would be sensitive to a sizeable acquisition.

In Fitch's view, FNFG's commercial real estate (CRE) business and residential mortgage portfolio (roughly about $14.7 billion) should continue to experience steady credit performance. However, Fitch has noted concerns with FNFG's risk profile given aggressive growth. Further, the company also entered relatively new business lines such as indirect auto, leveraged lending, and asset-based lending at a time when competition for loans is fierce. Despite continued stable asset quality measures, we believe FNFG's historical credit metrics may not be indicative of future performance.

The placement of FNFG on Rating Watch Positive reflects that its pending acquisition by KeyCorp can address a number of issues that have been affecting the company. These include its relatively weak capital position, low profitability, and rapid growth. Fitch expects to resolve FNFG's Rating Watch upon the completion of the transaction with KEY, with closing expected in 3Q16, subject to customary closing conditions, including required regulatory approvals.

SUPPORT RATING AND SUPPORT RATING FLOOR
Similar to most commercial U.S. banks, KEY and FNFG have a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, KEY and FNFG are not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not currently incorporate any support.

HOLDING COMPANY
KEY's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which means it 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 default probabilities

FNFG's IDR and VR are equalized with those of its bank subsidiary, First Niagara Bank, reflecting its role as the bank holding company, which means it 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 default probabilities.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
KEY's preferred securities are rated five notches below its VR. Preferred stock is notched two times from the VR for loss severity, and three times for non-performance. Hybrid securities ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, these ratings have been affirmed due to the affirmation of the VR.

FNFG's preferred securities are rated five notches below its VR. Preferred stock is notched two times from the VR for loss severity, and three times for non-performance. Hybrid securities ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, these ratings have been affirmed due to the affirmation of the VR.

SUBSIDIARY AND AFFILIATED COMPANY
The IDRs and VRs of KEY's bank subsidiary benefits from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of KeyBank NA are equalized across the group.

The IDRs and VRs of FNFG's bank subsidiary benefits from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of First Niagara Bank NA are equalized across the group.

LONG- AND SHORT-TERM DEPOSIT RATINGS

KEY's uninsured deposit ratings 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.

FNFG's uninsured deposit ratings 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.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT

KEY's Negative Outlook could be revised to Stable should the bank successfully execute on the integration of FNFG, credit mark sufficiently addresses any credit issues, regulators approve the merger in a timely manner, and KEY's projected figures for the transaction materialize, including internal rate of return, estimated profitability measures, expected cost saves and solid capital position in line with its forecasts.

Should operational and integration risks arise that are material to financial performance as well as the overall risk profile of the entity, KEY's rating would likely be downgraded.

FNFG's ratings will likely be upgraded and equalized with Key upon the completion of the acquisition. However, FNFG's ratings could come under negative pressure should KEY be unable or unwilling to complete the acquisition.

SUPPORT RATING AND SUPPORT RATING FLOOR
KEY's and FNFG's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need.

HOLDING COMPANY
Should KEY begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of KeyBank NA.

Should FNF begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of First Niagara Bank.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital issued by KEY and its subsidiary are primarily sensitive to any change in KEY's VR.

The ratings of subordinated debt and other hybrid capital issued by FNFG and its subsidiary are primarily sensitive to any change in FNFG's VR.

SUBSIDIARY AND AFFILIATED COMPANIES
As the IDRs and VRs of the subsidiaries are equalized with those of KEY to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in KEY's IDRs.

As the IDRs and VRs of the subsidiaries are equalized with those of FNFG to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in FNFG's IDRs.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by KEY and its subsidiaries are primarily sensitive to any change in KEY's long- and short-term IDRs.

The ratings of long- and short-term deposits issued by FNFG and its subsidiaries are primarily sensitive to any change in FNFG's long- and short-term IDRs.

The rating actions are as follows:

Fitch affirms the following:
KeyCorp
--Long-term IDR at 'A-'; Outlook Negative;
--Short-term IDR at 'F1';
--Viability at 'a-';
--Senior debt at 'A-';
--Subordinated debt at 'BBB+';
--Preferred stock at 'BB';
--Short-term debt at 'F1';
--Support at '5';
--Support Floor at 'NF'.

KeyBank NA
--Long-term IDR at 'A-'; Outlook Negative;
--Short-term IDR at 'F1';
--Viability at 'a-';
--Long-term deposits at 'A';
--Senior debt at 'A-';
--Subordinated debt at 'BBB+';
--Short-term deposits at 'F1';
--Support at '5';
--Support Floor at 'NF'.

Key Corporate Capital, Inc.
--Long-term IDR at 'A-'; Outlook Negative;
--Short-term IDR at 'F1'.

KeyCorp Capital I - III
--Preferred stock at 'BB+' .

Fitch has placed the following ratings on Rating Watch Positive:

First Niagara Financial Group, Inc
--Long-term IDR 'BBB-';
--Short-term IDR 'F3';
--Viability rating 'bbb-';
--Senior unsecured 'BBB-';
--Preferred stock 'B';
--Subordinated debt 'BB+';

First Niagara Bank
--Long-term deposits at 'BBB';
--Long-term IDR at 'BBB-';
--Viability at 'bbb-'
--Short-term deposits at 'F3';
--Short-term IDR at 'F3'.

Fitch has affirmed the following ratings:

First Niagara Financial Group, Inc
First Niagara Bank
--Support at '5';
--Support Floor at 'NF'.