Moody's Investors Service has confirmed the security ratings of National Rural Utilities Cooperative Finance Corporation (CFC) (Senior Secured Debt at Aa3) and has changed the rating outlook on the securities to stable from positive.
Ratings confirmed include CFC's senior secured debt at Aa3; senior unsecured debt at A1; subordinate debt at A2 and the company's short-term debt rating for commercial paper at Prime-1. Also confirmed are secured tax-exempt obligations of rural cooperatives guaranteed by CFC, at Aa3; unsecured tax-exempt obligations of rural cooperatives guaranteed by CFC, at A1; unsecured debt of National Cooperative Services Corporation (NCSC), guaranteed by CFC, rated A1; NCSC's short-term debt rating for commercial paper at Prime-1; and shelf registrations for senior secured debt, senior unsecured debt, and subordinate debt at (P)Aa3, (P)A1, and (P)A2, respectively.
The change in rating outlook reflects the continued increase in leverage required to keep pace with the very strong growth in CFC's balance sheet. Since FYE 1998, CFC's loans to members has grown by nearly 50% to $15.6 billion from $10.6 billion and has been financed largely with debt. Over that same time frame, total members' subordinate certificates and members' equity has remained relatively flat, increasing by only $101 million. Consequently, CFC's debt to equity ratio, as calculated by Moody's, has increased from 5.88 times in 1998 to 8.65 times at 02/29/00. CFC has a stated objective to manage leverage (as defined by CFC) in the eight times range and its board, this past year, approved measures which will increase both the level of members' equity and subordinate certificates over the next several years. However, the growth in equity resulting from management's recent initiatives is not expected to keep pace with the continued growth in the balance sheet.
In addition, CFC's loan portfolio mix has shifted. In 1998, loans to electric distribution cooperatives, which had replaced, on a percentage basis, a large portion of CFC's exposure to generation cooperatives, represented 70% of CFC's total loans. Since 1998, loans to electric distribution cooperatives have declined on a percentage basis to the low 60% range, while loans to the telecommunication sector have increased by 114% to $3.5 billion at 02/29/00 from $1.5 billion and now represent 21% of CFC's total loan portfolio. Of particular concern to Moody's in this sector has been the recent growth in loans to PCS, cellular and cable industries. Although CFC's secured lending position mitigates a significant portion of this risk, Moody's views these sectors as having greater competitive risks than the local exchange carrier or the electric distribution markets. Collectively, loans to these sectors have increased by 152% to $910 million at 02/29/00 from $360 million at FYE 1998 and represent about 6% of CFC's total portfolio.
The rating outlook change further incorporates the increasing number of large single obligor exposures at CFC. Although this element has existed at CFC since its inception, Moody's views single obligor risk as a larger risk factor given CFC's equity base.
The rating confirmation (senior secured debt at Aa3) incorporates CFC's very strong competitive position, its successful business track record, and the quality of the company's loan portfolio, which has an outstanding loan loss history and a strong collateral position. More than 90% of CFC's loans are secured and CFC's total losses since its inception have aggregated only $78.8 million on a net basis. Nonperforming loans at 02/29/00 were $29.6 million, while restructured loans at 02/29/00 were $575.4 million. CFC has historically demonstrated an ability to effectively manage difficult credit situations, driven in part by its strong security position. CFC enjoys a very strong and loyal relationship with its cooperatives, which helps to button down its market position.
Future rating actions will depend upon CFC's ability to manage the growth in its balance sheet and the resulting increase in leverage, while maintaining a portfolio mix that remains focused around the lower risk segments of the rural electric and rural telecommunications business sectors.
Headquartered in Herndon, VA, CFC is the principal source of private financing for rural electric and rural telephone cooperatives.
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