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20 Oct 2010
Approximately $10 Billion of Debt Securities Affected.
New York, October 20, 2010 -- Moody's has affirmed all of National Rural Utilities Cooperative Finance
Corporation (NRUC) ratings, including its A1 senior secured collateral
trust bond rating, its A2 senior unsecured rating, and its
Prime-1 short-term rating. Concurrent with this rating
affirmation, Moody's has a assigned a (P)A1 rating to the
shelf registration for NRUC's issuance of senior secured collateral
trust bonds. NRUC's rating outlook is stable.
The rating affirmation reflects the high quality of NRUC's loan
portfolio, its unique market position as the dominant lender to
electric distribution cooperatives, an ability to continue producing
margins consistent with its targeted adjusted TIER, a good track
record in managing credit restructurings, an improved risk management
program, and declining exposure to the more volatile telecommunications
A core element of NRUC's credit strength is the durability of its loan
portfolio as the dominant secured lender to electric distribution cooperatives.
Moody's views this segment as being 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. Loans to electric distribution cooperatives represent
71% of NRUC's loan portfolio at 08/31/2010 and loans to rural electric
cooperatives represent more than 90% of the total portfolio.
Adding to the strength of NRUC's loan portfolio is the fact that 89%
of its loans are secured, which together with the portfolio's low
historic default probability, result in a loan portfolio that has
historically produced very modest net loan losses.
The affirmation acknowledges continued progress made by NRUC in working
to resolve a large nonperforming loan to a bankrupt Virgin Islands telecommunications
company. To that end, Moody's observes that on October
6th NRUC completed the transfer of control of the borrower's US Virgin
Islands operating companies to NRUC, and will operate these businesses
through a wholly owned subsidiary. While the transfer of control
will result in the recognition of a sizable loan loss during fiscal year
second quarter, completion of the transfer is viewed an important
step toward reducing NRUC's exposure to the more risky telecommunications
The rating affirmation factors 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 degree of 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 some headway to
deal with single obligor risk, particularly within its telecommunications
portfolio, single obligor risk is likely to remain a characteristic
of the NRUC lending platform.
Moody's also observes that NRUC's leverage, while on a slowly declining
trend, remains relatively high particularly given the lack of liquidity
on the asset side of the balance sheet relative to other financial institutions.
During fiscal year 2009, NRUC implemented two initiatives that we
believe should reduce leverage over time. Specifically, NRUC
sold $398 million of member capital securities to its owners,
the member cooperatives, as a means of bolstering the equity component
of NRUC's capital structure, and in June 2009, as a means
of increasing equity retention, NRUC revised its guidelines related
to the timing and amount of patronage capital to be distributed.
Under the new guidelines, NRUC will retire 50% of prior year's
allocated net earnings and hold the remaining 50% for 25 years.
We calculate that the change in the patronage capital cycle coupled with
better margins should increase members' equity by less than $200
million over the next three years.
NRUC's ratings consider the continuing but reducing reliance that
it has on wholesale funding as a source of capital. In NRUC's case,
the member cooperatives continue to provide more than 20% of NRUC's
total funding, and access to private financing exists from the Federal
Financing Bank as part of the Rural Economic Development Loan and Grant
program (REDLG) and from Federal Agricultural Mortgage Corporation (Farmer
Mac). Together, both arrangements have provided NRUC with
long-term funding and commitments that approaches $6 billion
which Moody's views favorably from a credit perspective. To that
end, we observe that in September 2010, NRUC obtained a commitment
from FFB to provide additional funding of up to $500 million under
the REDLG program. Notwithstanding these funding sources,
NRUC is still reliant on the capital markets in most years to principally
meet maturing debt obligations. Within the last year, NRUC
accessed the long-term capital markets through the sale of collateral
trust bonds and has in the recent past been an active issuer of unsecured
medium term notes, principally through a retail InterNotes program.
Moody's observes that in most years, NRUC's amortizing loan portfolio
provides around $1 billion of cash flow to the cooperative.
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 factors in
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 began to deemphasize
the core electric cooperative market.
Ratings affirmed include all of NRUC's senior secured collateral trust
bonds and notes at A1, all of NRUC's senior unsecured debt at A2,
all of NRUC's subordinate debt (quarterly income capital securities) at
A3, and shelf registrations for all of NRUC's senior secured debt,
senior unsecured debt and subordinate debt at (P)A1, (P)A2,
and (A3), respectively. Also affirmed are NRUC's Prime-1
short-term rating as well as the Prime-1 short-term
rating for National Cooperative Services Corporation (NCSC). NRUC
guarantees NCSC's commercial paper. Additionally, Moody's
affirmed the A2 and VMIG-1 ratings assigned to all NRUC guaranteed,
tax-exempt debt issued by municipal entities for the benefit of
individual member electric cooperatives.
..Issuer: National Rural Utilities Coop. Finance
....Senior Secured Shelf, Assigned (P)A1
The principal methodologies used in rating NRUC are Analyzing the Credit
Risks of Finance Companies published in October 2000, and U.S.
Electric Generation & Transmission Cooperatives,published in
May 2006. 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 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. At August 31, 2010, approximately 90%
of NRUC's total loan portfolio was with rural electric cooperatives.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms National Rural Utilities ratings; outlook stable
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New York, NY 10007
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