Credit rating agency Standard & Poor's cut its outlook on mutually-owned conglomerate The Co-Operative Group to "negative" from "stable," due to risks associated with the Co-Op's planned purchase of some 630 Lloyds bank branches.
Earlier this month, Lloyds said it had picked The Co-Op as its preferred bidder for 632 branches which it has been forced to sell by European regulators as payback for having been bailed out by the British government during the 2008 credit crisis.
Lloyds, which is 40 percent owned by the government as a result of the state rescue, said it hoped to agree a deal with the Co-Op by the end of March.
However, it kept open the option of spinning off the assets into a separate entity and then listing them on the stock market if it failed to complete the transaction with Co-Op.
S&P said the planned takeover carried several risks, partly because the Co-Op is already in the process of integrating its takeover of savings and loans firm Britannia Building Society from 2009.
"The acquisition of the Lloyds branches would be the Co-Operative's third sizable and transformative acquisition since 2009," S&P said in a statement.
"However, we think that management's intention to place a bid while still integrating previous acquisitions reflects a higher propensity for risk than we previously anticipated," it added, keeping a "BBB-" long-term rating on the group.
The Co-Op, which runs a financial services arm along with its better-known supermarket chain, beat off competition from new bank venture NBNK (NBNK.L) to win Lloyds' approval in the branch sale process.
Analysts have said the company may need to raise money through a debt issue to fund the acquisition, which they say could be worth some 1 billion pounds.
City A.M. Reporter