Fitch to rate CapitalSource convertibles BB+

Fitch Ratings said it affirmed CapitalSource, Inc.'s long-term issuer default debt rating and senior unsecured debt rating at BBB- and that it expects to assign a BB+ rating to the company's planned $555 million issuance of senior subordinated convertible debentures.

The outlook is stable.

In a voluntary exchange offer, CapitalSource expects to issue subordinated convertible debt in exchange for the existing senior convertible notes issued in 2004. Senior holders that volunteer for conversion will receive additional yield; 37.5 basis points on one issuance and 50 basis points on the other. Fitch recognized that this debt conversion is an effort to improve the company's funding flexibility.

CapitalSource's ratings reflect the company's operating success to date, successful transition to REIT status, focused business strategy, good asset quality, moderate financial leverage and solid liquidity, the agency said.

Fitch said it will continue to monitor closely the relative risk of mortgage-related assets and that additional concerns include the company's relatively short operating history and the limited ability to retain capital as a result of the decision to pay dividends as a REIT, which reduces financial flexibility.

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