Moody’s Investors Service affirmed its ratings and outlook on TD Bank following the announcement the bank had reached an agreement to sell its U.S. discount brokerage subsidiary, TD Waterhouse USA, to Ameritrade Holding Corporation.

The transaction, which calls for TD to sell TD Waterhouse USA to Ameritrade for 32% of the new entity and concurrently purchase an additional 7.9% of Ameritrade’s shares, is subject to Ameritrade shareholder approval. In a related transaction, TD also will purchase Ameritrade Canada–Ameritrade’s Canadian discount broker.

In affirming the ratings, Moody’s notes, although TD will hold a proportionally equivalent share in a franchise with enhanced commercial viability, the financing of the transaction is slightly negative from a credit perspective. The transaction calls for an effective outlay by TD of $1.5 billion in cash; while the new entity, TD Ameritrade, will have significantly higher leverage as a result of a US$2 billion debt issuance to fund a one-time dividend payment.

Nevertheless, Moody’s believes TD has the economic ability to absorb these challenges even if this investment becomes impaired. It noted, the bank benefits from a sizable market presence and strong recurring earnings in its Canadian banking franchise. “TD has been successful in shifting its strategy towards businesses with more favorable risk-return characteristics–namely, Canadian personal, commercial, and wholesale banking–and away from businesses where the bank lacks franchise strength, such as in U.S. corporate lending,” it says. “The implication of this shift is an improved credit profile because a greater proportion of its capital is allocated to businesses with better credit fundamentals.”

Moody’s pointed out the transaction also raises some longer-term credit challenges: it increases TD’s investment in entities with untested governance structures, adding this transaction to the recently completed acquisition of 56% of the Banknorth Group Inc.; the competitive intensity that TD Ameritrade faces remains unchanged, as it would still be competing against a larger, more formidable competitor in Charles Schwab Inc.; the enlarged company faces the challenge of retaining customers throughout the post-merger integration period; and there is considerable uncertainty associated with equity valuations in this industry.

Upward rating pressure would likely follow continued strengthening of TD’s performance on Moody’s key profitability and asset quality ratios, the avoidance of any material strategic or operational setbacks in the U.S.–following the completion of the Ameritrade transaction and its 56% acquisition of Banknorth–and the continuation of the bank’s decision to retreat from U.S. corporate lending, the rating agency adds.

Negative rating pressure could emerge if TD reversed its decision on reducing its exposure to the U.S. corporate sector. Moody’s also notes that a weakening of Banknorth’s intrinsic financial strength could result in negative rating pressure for TD. In addition, if TD were to take on additional leverage to support a significant Banknorth acquisition it could also result in negative rating pressure for TD, it notes.