Dominion Bond Rating Service has confirmed its ratings of Toronto-Dominion Bank and TD Banknorth Inc. on the news that TD intends to privatize TD Banknorth.

TD currently has a 57% ownership stake in TD Banknorth. It announced that it has entered into an agreement with minority shareholders to purchase the outstanding shares of TD Banknorth that the bank does not currently own.

DBRS says that its confirmation of TD’s ratings reflects its belief that the transaction will increase TD’s ability to execute on its strategy to grow its U.S. retail banking business. DBRS’s rating action also recognizes that this transaction has a meaningful negative impact of reducing tangible common equity to risk-weighted assets and Tier 1 capital ratios, due to the large component of goodwill generated by the transaction.

At the close of the transaction, the tangible common equity to risk weighted assets ratio is projected to fall to 7.0%, which is acceptable to DBRS. At 7.0% this ratio is at the bottom end of TD’s stated range, it notes. The bank has indicated its objective is to grow the tangible common equity to risk-weighted asset ratio closer to the 7.5% level by the end of fiscal 2007, which DBRS believes to be achievable given expected internal capital generation.

DBRS believes that the elimination of a large minority shareholder position in TD Banknorth will remove one of the challenges surrounding TD’s U.S. retail banking growth strategy. “The 100% ownership of TD Banknorth should provide TD with more flexibility toward implementing growth strategies for TD Banknorth. The acquisition is anticipated to be accretive to cash earnings in 2007,” it says.

DBRS notes that under the terms of the agreement TD will pay approximately $3.6 billion cash for the 43% outstanding shares of TD Banknorth. The transaction is anticipated to close in April 2007, pending regulatory approval.

The rating agency also stated that the transaction is neutral to slightly positive for TD Banknorth bondholders as it brings 100% ownership by the more substantial and highly rated parent while removing any remaining uncertainty with respect to the intentions of the TD Bank’s investment in TD Banknorth. “TD Banknorth’s ratings, however, already confer most of that benefit given the Toronto-Dominion Bank’s current 57% majority ownership,” it says.

DBRS also noted that this action is consistent with TD’s increasing level of involvement and management of TD Banknorth that has included a steadily increasing equity investment over time, active participation in its treasury operations and, most recently, the appointment of a TD executive as TD Banknorth’s chief executive officer, effective March 1, 2007. DBRS expects that the Toronto-Dominion Bank will continue to look to TD Banknorth as the primary vehicle of its U.S. expansion and will remain opportunistic with regard to expanding the franchise via acquisitions.