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28 Dec 2010
Approximately $1 Billion of Debt Securities Affected.
New York, December 28, 2010 -- Moody's has affirmed National Cooperative Services Corporation's
(NCSC) Prime-1 short-term rating for commercial paper.
The rating outlook for NCSC is stable. NCSC's rating and
stable rating outlook are based upon the guaranty provided by National
Rural Utilities Cooperative Finance Corporation (NRUC: A2 senior
unsecured; stable outlook) whose short-term rating for commercial
paper is Prime-1.
The rating affirmation of NCSC's Prime-1 commercial paper
program considers plans to increase the size of NCSC's commercial paper
program to $1.0 billion from $500 million in order
to provide the entity with greater borrowing capacity. Current
commercial paper outstandings under the NCSC program has increased in
the last few months to finance new loan growth coming from electric cooperative
borrowers electing to refinance certain 5.0% loans previously
originated with Rural Utilities Service (RUS). We understand that
NCSC's loan portfolio has increased by about $60 million
to approximately $414 million at August 31, 2010 as a result
of this new loan demand.
NCSC provides specialized lending for its member cooperatives, for
entities owned by its member cooperatives or to fund opportunities which
indirectly supports the cooperative sector. Of the existing NCSC
loan portfolio, the vast majority of loans represent amortizing
loans to member electric distribution cooperatives and their affiliates.
While this incremental loan growth opportunity at NCSC is a function of
today's very low interest rate environment, Moody's
continues to incorporate a view that year-over-year consolidated
loan growth at NRUC is expected to be remain relatively flat.
NRUC guarantees NCSC's commercial paper program and provides liquidity
support for the program through internal and external sources.
Internal sources of liquidity include principal loan repayments which
average at least $1 billion annually ($1.3 billion
during the next 12 months) as well as external sources, including
access to NRUC's committed bank facilities that currently aggregate
$3.349 billion. All three existing credit facilities
have a multi-year maturity. Approximately $967 million
of the facilities expire on March 22, 2011, $1.049
billion on March 16, 2012, and the remaining $1.335
billion on March 8, 2013. These credit facilities do not
contain a MAC clause but have financial covenants which are set at levels
that provide substantial cushion. The agreements require an adjusted
times interest earned ratio (adjusted TIER) average of 1.025 for
the last six quarters (excluding any non-cash adjustments for derivatives
and foreign currency adjustments) and a maximum senior debt to equity
ratio, as defined in the bank agreements, to not be more than
10x (excluding any non-cash adjustments for derivatives and foreign
currency adjustments). NRUC was comfortably in compliance with
these covenants at August 31, 2010 with an adjusted TIER of 1.12x
and a senior debt to equity ratio of 6.21x.
In addition to the three credit facilities described above, NRUC
has access to two additional sources of funding, including $513
million of availability under note purchase agreements with Federal Agricultural
Mortgage Corporation or "Farmer Mac" and a $500 million
commitment from Federal Financing Bank to provide twenty-year funding
under the Rural Economic Development Loan and Grant (REDLG) program.
Moody's also observes that member cooperatives continue to provide
a stable source of funding for NRUC. At August 31, 2010,
NRUC member cooperatives provided about $4.49 billion which
represented about 22.8% of total assets (less derivatives).
Of the $4.49 billion, $1.459 billion
represented short-term debt funding through $1.119
billion in members' commercial paper and $340 million in members'
contributions to the daily liquidity fund. NRUC's uses the dealer
commercial paper market to supplement any short-term funding requirements
not satisfied by the members.
NRUC has established a goal of maintaining its dealer commercial paper
and bank bid notes at no more than 15% of total debt. At
August 31, 2010, dealer commercial paper and bank bid notes
totaled approximately 6.5% of total debt outstanding.
NRUC's A2 senior unsecured rating and Prime-1 short term
rating are based on its high quality asset portfolio; its unique
market position as the dominant lender to electric distribution cooperatives;
an excellent competitive position that includes an ability to raise margins
on member loans; a good track record in managing credit restructurings;
an improved risk management program and a declining exposure to the more
volatile telecommunications sector. To that end, the rating
acknowledges the continued progress made by NRUC in working to resolve
a large nonperforming loan to a bankrupt Virgin Islands telecommunications
company as the US Virgin Islands operating companies were transferred
to a NRUC wholly-owned subsidiary earlier in October 2010.
The rating also takes into account NRUC management's efforts to reduce
the degree of single obligor exposure within the loan portfolio;
the company's continued but reducing reliance on capital markets to fund
its lending business, and its continuing high leverage.
For more information on NRUC, please refer to the Credit Opinion
and the Analysis, which can be found under moodys.com under
National Rural Utilities Cooperative Finance Corporation.
The stable rating outlook incorporates our view that modest loan growth
among rural electric cooperatives will help maintain strong asset quality
within the loan portfolio. To that end, the stable outlook
factors in our belief that the telecom portfolio, a source of loan
portfolio weakness, will continue to represent less than 10%
of the total loan portfolio. The stable outlook also considers
NRUC's plans to gradually lower leverage, and an expectation that
NRUC will maintain sufficient liquidity as well as access to private sources
of funding to mitigate the firm's reliance on wholesale funding.
In light of the relatively high leverage and the firm's exposure to potential
impairments from certain foreclosed assets, the prospect of a higher
rating is limited within the next twelve months.
The rating could be downgraded if a new meaningful problem loan surfaced
within NRUC's portfolio, if recently implemented capital raising
and capital retention efforts do not reduce NRUC's leverage over the next
twelve to eighteen months, if NRUC fails to maintain an adequate
liquidity profile including ample access to multi-year bank credit
facilities, or if the lending strategy begins to deemphasize the
core electric cooperative market.
The last rating action on NCSC and NRUC occurred on October 20,
2010 when the ratings were affirmed.
The principal methodologies used in rating NRUC and NCSC are Analyzing
the Credit Risks of Finance Companies published in October 2000,
and U.S. Electric Generation & Transmission Cooperatives,
published in December 2009. Other methodologies and factors that
may have been considered in the process of rating these issuers can also
be found in the Rating Methodologies sub-directory on Moody's website.
Based in Herndon, Virginia, NRUC is a private, tax-exempt
cooperative association exclusively serving rural electric, service,
and telecommunication utilities. The principal purpose of NRUC
is to provide its members with a source of financing to supplement the
loan programs of the Rural Utilities Service of the US Department of Agriculture.
At August 31, 2010, NRUC had total assets of approximately
$20.15 billion, of which loans to members represented
about $19.29 billion. NCSC is a private cooperative
association, which provides specialized financing and services to
entities owned by rural electric cooperatives.
Senior Vice President
Instrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Instrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms National Cooperative Services Corporation's Prime-1 short term rating
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