Fitch Ratings has placed the Long- and Short-Term Issuer Default Ratings (IDRs) and Viability Ratings (VRs) of First Horizon Corporation (FHN) and First Horizon Bank (FHB) on Rating Watch Positive following the announced sale of the company to The Toronto-Dominion Bank (TD, AA-/Stable).

Rating Withdrawals

Fitch has also withdrawn FHN and FHB's Support Ratings and Support Floor Ratings as they are no longer relevant to the agency's coverage following the publication of the updated Bank Rating Criteria on Nov. 12, 2021. In line with the updated criteria, Fitch has assigned FHN and FHB Government Support Ratings of 'ns' (no support).

Key Rating Drivers

IDRs and VRs

The Rating Watch Positive on FHN's ratings reflect Fitch's view that the purchase by TD will likely result in a stronger business and financial profile for FHN than it currently possesses on a standalone basis. For additional information on the transaction, see 'Fitch Ratings: Acquisition of First Horizon Corp Neutral for Toronto-Dominion Bank's Ratings.'

Prior to today's action, FHN's ratings had been on Positive Outlook reflecting Fitch's view of FHN's strengthening company profile as a standalone entity.

Key Rating Driver 1

Fitch will resolve FHN's Rating Watch upon completion of the transaction with TD, which is expected in early 2023.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch could remove FHN's ratings from Rating Watch Positive (RWP) if execution challenges lead to a termination of the transaction, which could prove a distraction from the bank's own strategic plans.

Fitch considers the likelihood of a downgrade to be remote as FHN's ratings had been on Positive Outlook prior to the acquisition announcement.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

FHN's ratings will likely be upgraded and equalized with those of TD upon completion of the acquisition.

Fitch expects the resolution of the Rating Watch may occur subsequent to six months in the future, outside Fitch's normal Rating Watch time horizon, given that this sale is expected to close in early 2023 and the potential for regulatory delays.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

LONG- AND SHORT-TERM DEPOSIT RATINGS

FHB's long-term deposits are rated one notch higher than their LT IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

FHN's and FHB's preferred stock rating is notched four levels below the respective entities' VRs, two times for loss severity and two times for non-performance.

FHB's subordinated debt is notched one level below FHB's VR for loss severity. In accordance with the Bank Rating Criteria, this reflects alternate notching to the base case of two notches due to Fitch's view of U.S. regulator's resolution alternatives for an entity like FHN as well as early intervention options available to banking regulators under U.S. law.

These ratings are in accordance with Fitch's criteria and assessment of the instrument's nonperformance and loss severity risk profiles.

SENIOR DEBT

FHN's senior debt is equalized with its LT IDR, which reflects expected average recoveries. FHN's senior debt rating reflects the use of alternate notching for the entity's subordinated debt of one-notch, in which case the agency does not notch down senior unsecured debt.

HOLDING COMPANY

FHN's IDR and VR are equalized with those of FHB, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

GOVERNMENT SUPPORT RATING

Fitch has assigned FHN and FHB Government Support Ratings (GSR) of 'ns' (no support). In Fitch's view, the probability of government support is unlikely. IDRs and VRs do not incorporate any support.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

LONG- AND SHORT-TERM DEPOSIT RATINGS, SUBORDINATED DEBT AND OTHER HYBRID SECURITIES, SENIOR DEBT, HOLDING COMPANY AND SUBSIDIARIES

Fitch could remove FHN's and FHB's debt level ratings, and FHN's holding company ratings from RWP if execution challenges lead to a termination of the transaction

GOVERNMENT SUPPORT RATING

FHN's and FHB's GSRs are already at the lowest potential rating level, and as such, cannot be downgraded.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

LONG- AND SHORT-TERM DEPOSIT RATINGS, SUBORDINATED DEBT AND OTHER HYBRID SECURITIES, SENIOR DEBT, HOLDING COMPANY AND SUBSIDIARIES

FHN's and FHB's debt level ratings, and FHN's holding company ratings will likely be upgraded and equalized with those of TD upon completion of the acquisition.

GOVERNMENT SUPPORT RATING

FHN's and FHB's GSRs are sensitive to Fitch's assumptions regarding the respective entities' capacity to procure extraordinary support in case of need. There is a low likelihood that FHN's and FHB's GSRs ratings will change over the foreseeable future. However, the GSRs would be sensitive to Fitch's assumptions regarding FHN's and FHB's likelihood of procuring extraordinary support in case of need.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

VR ADJUSTMENTS

Fitch has assigned an Asset Quality score of 'bbb', which is below the 'a' category implied score, due to the following adjustment reason: Growth (Negative).

Fitch has assigned a Capitalization & Leverage score of 'bbb', which is below the 'a' category implied score, due to the following adjustment reason: Historical and future metrics (Negative).

Fitch has assigned a Funding & Liquidity score of 'bbb+', which is below the 'a' category implied score, due to the following adjustment reason: Historical and future metrics (Negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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