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23 Jan 2001
CONFIRMS SHORT-TERM RATING AT PRIME-1 AND VMIG-1.
New York, January 23, 2001 -- Moody's Investors Service has changed the rating outlook to negative from
stable on all of the long-term debt securities of National Rural
Utilities Cooperative Finance Corporation (CFC: Senior Secured Debt
at Aa3). CFC's short-term ratings are confirmed at Prime-1
and at VMIG-1.
The change in rating outlook reflects the disclosure in CFC's second quarter
10-Q, that effective January 1, 2001, it had
placed $853 million of senior secured loans to one borrower,
Denton County Electric Cooperative, Inc. (CoServ),
on non-accrual status with respect to the recognition of net income.
CoServ is an electric distribution cooperative with diversified operations.
Of concern to Moody's is the size of the nonperforming loan and the fact
that the problem loan surfaced in its electric distribution portfolio,
a segment whose portfolio has performed without loss since CFC's inception.
The apparent source of the CoServ problem relates, in large part,
to the cooperative's diversification strategy, which encompasses
the real estate development, telecommunications, natural gas
and security businesses.
Moody's believes that the loss of the loan income from CoServ could have
an impact on CFC's net margins. However, CFC does have pricing
flexibility in a large portion of its portfolio to raise margins,
which could help to offset this margin reduction in the near-term.
In fact, since mid-2000, CFC has taken actions to increase
margins and subordinated certificates on its loan portfolio in an effort
to raise members' equity. Along the same lines, CFC may need
to increase the size of the loan loss allowance given that its loan loss
reserve stands at approximately $245 million, which,
in Moody's opinion, is modest relative to CFC's nonperforming and
restructured loan and guarantee exposure ($1.489 billion).
Although CFC has no other nonperforming loans, CFC does have a $681
million loan and guarantee exposure, classified as restructured,
to Deseret Generation & Transmission Co-operative (Deseret).
Moody's recognizes that Deseret continues to outperform projections,
but also notes that a portion of the $245 million loan loss reserve
is set aside specifically for Deseret. According to the company's
10-Q, CFC has reduced the loan loss allowance for Deseret
to $60 million as of November 30, 2000.
Of additional concern to Moody's is the fact that the loss of the CoServ
margins could impede CFC's plans to better balance its capital structure.
CFC has raised $201 million in additional subordinated certificates
and members' equity since May 31, 2000 through margin retention
and capital raising initiatives implemented towards the end of last fiscal
year. These initiatives, while not improving CFC's capital
structure, have slowed the growth in leverage. CFC's funded
debt/equity ratio, as calculated by Moody's, rose slightly
to 8.91 time at November 30, 2000 from 8.83 times
at May 31, 2000. Moody's calculates its funded debt to equity
ratio as being total funded debt divided by the sum of subordinate certificates
and members' equity. Notwithstanding the company's ability to increase
margins in their portfolio, Moody's has concerns that the addition
of CoServ as a nonperforming asset could impact CFC's ability to improve
its capital structure.
Another factor impacting the negative outlook includes the large single
obligor risk that continues to exist in CFC's electric and telecommunications
portfolios. The top ten electric and telecommunications borrowers
represent 24% of CFC's total loan portfolio, while the top
twenty represent 34% of CFC's total loan portfolio. Additionally,
the top ten telecommunications borrowers account for 64% of CFC's
total telecommunications loan portfolio. Compounding the single
obligor issue is the fact there is little liquidity on the asset side
of CFC's balance sheet, given the pricing that exists on the majority
of its loans. CFC has announced plans to sell down portions of
a number of its recently-booked, large telecommunications
loans, but aside from that activity, which has yet to be completed,
it remains difficult, in Moody's opinion, for CFC to reduce
this single obligor risk. The CoServ exposure only serves to illustrate
the risk associated with this ongoing issue.
Moody's acknowledges CFC's track record in dealing with difficult credit
situations. Since the company's inception in 1969, CFC has
successfully worked out numerous difficult problem credits and has only
suffered $80 million in loan losses. However, Moody's
also notes that the CoServ problem may end up being a bit more challenging
in light of CFC's indirect exposure to CoServ's diversified business activities.
Moody's also notes that management intends to reduce the growth in its
balance sheet and to focus greater attention on portfolio management and
equity management. CFC's ability to implement and meet disciplined
initiatives along this front will be viewed as supportive to credit quality.
Over the next few months, Moody's will continue to assess the developments
relating to the CoServ loan, as well as CFC's plans for managing
this exposure, while mitigating the impact on its earnings and capital
structure. Separately, we will also examine CFC's entire
loan portfolio to assess the degree of diversified business exposure that
exists in both the electric and telecommunication portfolio. Finally,
Moody's will seek to understand steps taken by CFC in the last few months
to slow the growth in its balance sheet and to focus on portfolio and
SHORT-TERM RATINGS CONFIRMED
CFC's short-term rating for commercial paper, extendible
commercial notes, and euro medium-term notes is confirmed
at Prime-1. NCSC's Prime-1 short-term rating
for commercial paper, which is guaranteed by CFC, is also
confirmed. Finally, the Prime-1 and VMIG-1
rating for variable rate demand notes issued by rural cooperatives and
guaranteed by CFC is confirmed.
Headquartered in Herndon, VA, CFC is the principal source
of private financing for rural electric and rural telephone cooperatives.
Susan D. Abbott
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
VP - Sr Credit Officer
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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