Standard & Poor’s today reaffirmed its ratings on the Bear Stearns Companies Inc., but changed its outlook to negative. The firm expressed disappointment with the move.

The rating agency said that, notwithstanding the challenges it currently faces, it believes Bear
Stearns’ liquidity is strong. “Still, the negative outlook reflects our concerns about recent developments and their potential to hurt Bear Stearns’ performance for an extended period,” noted Standard & Poor’s credit analyst Diane Hinton. “We believe Bear Stearns’ reputation has suffered from the widely publicized problems of its managed hedge funds, leaving the company a potential target of litigation from investors who have suffered substantial losses.”

Bear Stearns has material exposure to holdings of mortgages and MBS, the valuations of which remain under severe pressure, S&P noted. It also has exposure to debt it has taken up as a result of unsuccessful leveraged finance underwritings, and it has significant further underwriting commitments, the firm noted. “Broadly, we believe these direct balance-sheet exposures are not proportionately larger than those of Bear Stearns’ peers,” it noted.

“Also, despite these challenges, we expect Bear Stearns to be profitable in the current quarter,” S&P added. “However, Bear Stearns has a relatively high degree of reliance on the U.S. mortgage and leveraged finance sectors, and its revenues and profitability would be especially affected if there were an extended downturn in those markets.”

The ratings could be lowered if large losses were to be incurred over the next few quarters or if earnings failed to stabilize at a satisfactory level beyond the next few quarters, S&P said, adding that it expects the next few quarters will be, at best, difficult ones for the company. “On the other hand, if Bear Stearns can overcome current challenges and effect a more rapid recovery than we currently anticipate, the rating outlook could be revised back to stable,” it added.

Bear Stearns said that it is disappointed with S&P’s decision to change its outlook on the firm. “Most of the themes highlighted in its report are common to the industry and are not likely to have a disproportional impact on Bear Stearns,” it said. “S&P’s specific concerns over issues relating to certain hedge funds managed by BSAM are unwarranted as these were isolated incidences and are by no means an indication of broader issues at Bear Stearns.”

“S&P’s action highlights the concerns in the marketplace over the recent instability in the fixed income environment,” said James Cayne, chairman and chief executive officer of The Bear Stearns Companies. “Contrary to rumors in the marketplace, our franchise is profitable and healthy and our balance sheet is strong and liquid. Bear Stearns has thrived throughout both tumultuous and fortuitous markets for the past 84 years. We are experiencing another market cycle and we are confident in Bear Stearns’ ability to succeed in this environment as it has in so many others.”

With respect to operating performance and financial condition, the company said it has been solidly profitable in the first two months of the quarter, while the balance sheet, capital base and liquidity profile have never been stronger. Bear Stearns’ risk exposures to high profile sectors are moderate and well-controlled, it added.

It also said that its risk management infrastructure and processes remain conservative and consistent with past practices. “This structure and strong risk management culture has allowed the firm to operate for all of its history as a public company without ever having an unprofitable quarter,” it noted.

All other major rating agencies have affirmed their stable or positive outlook on Bear Stearns within the last six weeks, the firm said.