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Rating Action:

Moody's affirms National Rural Utilities ratings; outlook is stable

Global Credit Research - 24 Nov 2014

Approximately $11.3 billion of debt securities affected

New York, November 24, 2014 -- Moody's Investors Service today affirmed all of National Rural Utilities Cooperative Finance Corporation's (NRUC) ratings. Ratings affirmed include NRUC's senior secured collateral trust bonds and notes at A1, NRUC's senior unsecured debt at A2, NRUC's subordinate debt (quarterly income capital securities) at A3, the shelf registrations for NRUC's senior secured debt and senior unsecured debt at (P)A1 and (P)A2, respectively, and NRUC's Prime-1 short-term rating for commercial paper. Additionally, Moody's affirmed the A2, VMIG-1, and P-1 ratings assigned to NRUC guaranteed tax-exempt debt issued by municipal entities for the benefit of individual member electric cooperatives. NRUC's rating outlook is stable.

RATINGS RATIONALE

The rating affirmations reflect the high quality of NRUC's loan portfolio, its unique market position as the dominant lender to electric cooperatives, an ability to continue producing margins at or above its targeted 1.1 times adjusted times interest earned ratio (TIER), a good track record of managing credit restructurings, a sound risk management program, and significantly reduced exposure to the more volatile telecommunications sector. "A core element of NRUC's credit strength is the durability of its loan portfolio as the dominant secured lender to electric cooperatives", said Vice President-Senior Analyst, Kevin Rose. "This sector is low risk and capable of producing highly predictable cash flows due to most cooperatives' monopoly position as well as the cooperatives' ability to pass along most cost increases to their electric customers when needed, without the approval of state regulators", Rose added. Loans to electric distribution cooperatives represent 75% of NRUC's loan portfolio at August 31, 2014 and loans to rural electric cooperatives (RECs) and entities owned, operated and controlled by RECs represent approximately 98% of the total portfolio. Adding to the strength of NRUC's loan portfolio is the fact that almost 90% of its loans are secured, which together with the portfolio's low historic default rate, result in a loan portfolio that has historically produced very modest net loan losses.

The affirmations also acknowledge NRUC's steady progress in reducing the level of foreclosed assets in the loan portfolio, with a particular focus on rehabilitating the assets held by Caribbean Asset Holdings (CAH), which owns 100% of the equity interests of Innovative Communication Corporation's (ICC) United States Virgin Island, British Virgin Island and St. Maarten telecommunication operating entities. NRUC's ultimate goal for CAH is to sell the business and to maximize recovery consistent with its objective to reduce exposure to the more risky telecommunications industry.

The rating affirmations factor in the credit benefits of NRUC's unique role as a tax-exempt cooperative providing a supplemental source of low-cost capital to its cooperative membership. Unlike other finance companies, NRUC is a cost-plus lender with a business model that tends to exhibit an overall lower credit risk profile as its success is not determined by achieving earnings targets, balance sheet expansion, or profitability objectives.

Balancing these factors is the concentration risk that remains within NRUC's operations as well as its degree of single obligor risk within the loan portfolio. While NRUC has made substantial headway to address single obligor risk, particularly within its telecommunications portfolio, such risk is likely to remain a characteristic of the NRUC lending platform. The rating also considers Moody's assessment of the average credit quality of NRUC's electric cooperative member base, with many of its unrated borrowers exhibiting single A or Baa credit characteristics.

Due to the nature of its business, NRUC does not have common stock in its capital structure. In its place, Moody's views the deeply subordinated capital term certificates as equity. Although NRUC largely funds incremental loan volume with debt, its ratio of adjusted funded debt to adjusted members' equity according to Moody's calculations is substantially better today than in 2009 because of members investing in member capital securities, a conservative change in NRUC's equity retention plan, an increase in members' capital reserve from net margins accretion and the additional equity it transferred after revising its loan loss allowance in 2013. At August 31, 2014, the NRUC ratio of adjusted funded debt to adjusted members' equity, including Moody's adjustments, was 7.14 times, which is within the range of 7.04-7.22 times achieved during fiscal years 2010-2014 and considerably better than the 7.8 times at May 31, 2009.

Although NRUC continues to rely on wholesale funding as a source of capital, the firm's credit quality benefits from its success in reducing reliance on this type of funding. In NRUC's case, the member cooperatives are providing about 20% of NRUC's total debt funding, and access to private financing exists from the Federal Financing Bank (FFB) of the US Treasury under the Guaranteed Underwriter Program (GUP) and from the Federal Agricultural Mortgage Corporation (Farmer Mac). Together, both arrangements have provided NRUC with long-term funding that approaches $6 billion as of August 31, 2014, which Moody's views favorably from a credit perspective. Also as of August 31, 2014, NRUC had about $3,069 million of remaining funding capability in aggregate under the two programs and in November 2014, NRUC obtained a $250 million additional commitment under the GUP. Notwithstanding these diversified funding sources, NRUC still remains dependent upon wholesale short-term and long-term funding. NRUC's primary sources of long-term capital market funding include secured collateral trust bonds (CTBs), unsecured medium term notes (MTNs) and InterNotes, and subordinated deferrable debt, with proceeds used in most years to principally meet maturing debt obligations. Moody's observes that in most years, NRUC's amortizing loan portfolio provides around $1 billion of cash flow to the cooperative.

The affirmation of NRUC's short term ratings reflects the firm's adequate liquidity as it proactively manages its various committed bank facilities which Moody's considers to be NRUC's principal form of external liquidity support. These arrangements supplement $891 million of cash, cash equivalents and time deposits as of August 31, 2014 and about $1.35 billion of scheduled long-term loan amortizations and repayments over the next 12 months. NRUC also has about $3.32 billion available under the arrangements with FFB and Farmer Mac. During October 2014, NRUC consolidated its three previously existing committed credit facilities into two facilities and in the process added $194 million of availability in aggregate, bringing the total of the two facilities to $3,420 million. Specifically, NRUC amended its four-year $1,123 million facility by increasing the aggregate amount to $1,720 million and maintaining the October 28, 2017 expiration date, while increasing the aggregate amount of its $1,068 million five-year facility to $1,700 million and extending its expiration date to October 28, 2019. At the same time, NRUC terminated its previously existing $1,036 million three-year facility which was scheduled to mature on October 28, 2016. With these steps, NRUC effectively increased the total amount of commercial paper that can be issued by the company post October 28, 2014, to the aforementioned $3,420 million. These credit facilities do not contain a MAC clause but have financial covenants which are set at levels that provide substantial cushion.

The stable rating outlook incorporates Moody's view that any loan growth among RECs will help maintain strong asset quality within the loan portfolio, particularly with the telecom loan portfolio becoming a non-material portion of the total loan portfolio. The stable outlook also considers NRUC's ongoing commitment 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 ongoing exposure to certain foreclosed assets, the prospect of a rating upgrade is limited within the next twelve months. The rating is constrained by the credit quality of its electric cooperative member base, many of which Moody's believes are exhibiting credit characteristics in the single A or Baa range.

Prospects for a positive rating action exist beyond 12-months if leverage declines further, liquidity remains strong, alternatives to wholesale capital market funding increase in number and depth, while NRUC continues to maintain a relatively clean portfolio with no new large non-performing assets. This is particularly the case if the NRUC loan portfolio can demonstrate an ability to produce stable financial results which exceed the 1.1 times adjusted TIER target on a consistent basis.

A negative rating action could result if one or more new large problem loans surfaced within NRUC's portfolio, if the lending strategy began to focus on growing its lending to non-core electric cooperative markets, if ongoing capital raising and capital retention efforts do not reduce NRUC's leverage, if access to private sources of long-term capital become constrained or if NRUC fails to maintain an adequate liquidity profile, including ample access to good quality multi-year bank credit facilities.

Based in Dulles, Virginia, NRUC is a private, tax-exempt cooperative association exclusively serving rural electric 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, 2014, NRUC had total assets of approximately $22.23 billion, of which loans to members represented about $20.48 billion. At August 31, 2014, approximately 98% of NRUC's total loan portfolio was with RECs and entities owned, operated and controlled by RECs.

The methodologies used in these ratings were Finance Company Global Rating Methodology published in March 2012, and U.S. Electric Generation & Transmission Cooperatives published in April 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kevin G Rose
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms National Rural Utilities ratings; outlook is stable
No Related Data.
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