Moody's Investors Service has downgraded Butterfield Bank's long-term deposit and debt ratings, following the $550 million capital injection from a group of investors.

Without the infusion of capital, the scale of writedowns of troubled investments "would have critically weakened Butterfield's regulatory capital ratios and its ratio of tangible common equity to risk-weighted assets".

Fitch also lowered its individual rating on the bank from to F from C, with the expectation of raising it to D or E within the next month.

"The Individual downgrade reflects Fitch's view that the bank's level of embedded losses in the securities portfolio necessitated the capital raise," Fitch stated. "Additionally, BNTB's operating challenges were isolated and not reflective of Bermuda's banking sector conditions."

Fitch noted the $132 million writedown last year on troublesome investments and said Butterfield had a sizeable holding of US mortgage-backed securities.

"Fitch believes the pro forma equity capital provides only a modest cushion should BNTB experience any credit deterioration in its core loan portfolio," the ratings agency added.

The bank expects to take a loss of $150 million to $175 million in the first quarter on ridding itself of the riskiest securities.

Standard & Poor's affirmed its A-/A-2 counterparty credit rating on Butterfield with a negative outlook.

Standard & Poor's credit analyst Robert Hansen said: "BNTB's improved capital position more than offsets its 2009 net losses and provides what we believe is a substantial buffer against potential further credit quality deterioration within the loan portfolio and weak operating performance."

Moody's affirmed the bank's highest-possible Prime-1 short-term deposit rating, but said the outlook on all ratings was negative. Butterfield's long-term deposit rating was lowered to A2 from A1 and its subordinated debt rating to A3 from A2.

The bank's Bank Financial Strength Rating (BFSR) remains C-, but Moody's said this now translates to a Baseline Credit Assessment of Baa2 down from Baa1.

Moody's said the new capital would be "sufficient to absorb foreseeable losses in its portfolios".

The agency added: "However, the bank faces a number of challenges after its risk management failures. In order to sustain its capital position and improve its near-term earnings prospects, Butterfield must reduce future concentration risks and interest-rate risks.

"Moody's believes new management is committed to address these issues, but these changes will take time to achieve. Furthermore, the share ownership by Carlyle and CIBC poses uncertainty with regard to the longer term strategic direction of the bank. This uncertainty combined with the challenges highlighted above are captured in the negative outlook on the bank's ratings."

Butterfield's deposit and debt ratings benefit from "a very high level of systemic support" from the Bermuda Government, Moody's added.