SANTIAGO, Dec 6 (Reuters) - Moody's Investors Servicedowngraded Chilean bank CorpBanca on Friday, citingfears about the impact on the bank of problems at a linkedbusiness also owned by billionaire Alvaro Saieh.
The downgrade comes at a time when the bank is in the midstof merger talks, according to several sources.
CorpBanca is part of Chilean businessman Saieh's financialempire, along with retailer SMU, which revealed accountingerrors that led it to breach covenants earlier this year.
He has since been seeking to raise cash and has been in NewYork this week negotiating a merger for CorpBanca, with thefront-runners being Spain's BBVA SA and Brazil's ItauUnibanco Holding SA, three sources told Reuters onWednesday.
Moody's downgraded CorpBanca's global, local and foreigncurrency deposits and debt ratings to Baa3 from Baa2 and leftthem on review for further downgrade.
"Moody's noted its concerns that the entities' associationwith the financially troubled SMU S.A. via their commonprincipal shareholder together with certain transactions withinthe financial group has hurt the funding flexibility and riskprofile of both the bank and its holding," the rating agencysaid.
SMU's July revelations of errors found during a review ofearnings was followed by a drop in CorpBanca's shares to anall-time low in August and pushed up its cost of borrowing. Thesituation has since improved.
The fifth largest bank in Chile as of the end of September,CorpBanca's problems prompted worry from the country's centralbank, which said this week that more oversight was needed ofcompanies that combine financial and non-financial operations.
Moody's added that the review would focus on the timing andextent to which the bank could extricate itself from thecrossover risk from SMU, a retail group that includes Unimarc,one of Chile's biggest supermarket chains.
The bank's merger discussion "reflects management's effortsto reinforce CorpBanca's franchise, but also raises questionsregarding the bank's strategic plan going forward," the agencysaid.
CorpBanca could not immediately be reached for comment.
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