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Rating Action:

Moody's assigns A2 to NRUC CREBs offering

01 Feb 2008
Moody's assigns A2 to NRUC CREBs offering

Approximately $ 31 Million of Debt Securities Affected.

New York, February 01, 2008 -- Moody's Investors Service assigned a senior unsecured rating of A2 to National Rural Utilities Cooperative Finance Corporation (NRUC) issuance of $30,520,000 in Clean Renewable Energy Bonds (CREBs) due 2023. Net proceeds from the financing are intended to be used to make loans to six qualified cooperative borrowers for the construction, refinancing, and/or reimbursement of capital expenditures related to qualified renewable projects and to pay the costs of issuance related to the bonds. NRUC's rating outlook is stable.

Created pursuant to Section 54 of the Internal Revenue Code (Code), CREBs are a form of tax credit bond which do not bear interest. In lieu of interest, bondholders receive federal tax credits from the United States government. While CREBs do not bear interest, these securities are senior unsecured obligations of NRUC, ranking pari-passu with NRUC's other senior unsecured debt, with principal payable in equal annual installments over the sixteen year life of the security.

NRUC's A2 senior unsecured rating is based on its excellent competitive position, including an ability to raise margins on member loans; management's strong track record in managing credit restructurings; the high quality of its loan portfolio measured in terms of loan loss history and collateral position; and the declining exposure to the telecommunications sector. The rating also takes into account management's efforts in recent years to reduce the degree of single obligor exposure within the loan portfolio; the company's reliance on capital markets to fund its business, its continuing high leverage and the challenges associated with managing certain problem loans. With respect to the latter, the rating factors in the current exposure with a large non-performing loan to a telecommunications borrower.

Moody's believes that CREBs are expected to provide fairly predictable returns to investors as principal is solely dependent upon NRUC's senior unsecured credit quality, while investment returns, in the form of federal tax credits, are determined up-front by the Secretary of the Treasury based upon the maturity of the bonds. Such tax credit rates remain unchanged over the life of the security so long as the security remains outstanding. Moody's understands that continued receipt of the CREBs tax credit is highly dependent upon the issuer, borrowers and projects all remaining in compliance with various conditions of Section 54 of the Code. For example, NRUC must remain a qualified issuer (as defined by Section 54 of the Code), each of the borrowers must remain qualified borrowers (as defined by Section 54 of the Code), and each of the individual projects must be completed and remain qualified projects (as defined by Section 54 of the Code). Moody's also understands that 95% of the net proceeds from the offering must be used for the construction of each of the qualified projects. Moreover, the terms of the financing agreements between each of the borrowers and NRUC require each of the borrowers to make representations and warranties concerning the borrower and their respective project, which helps to insure borrower and project level compliance with these provisions. Additionally, the CREBs indenture will require the establishment of separate accounts for each of the renewable projects, and each of these projects are expected to receive loan proceeds from NRUC after project specific construction costs have been incurred and supporting documentation has been presented to NRUC.

With respect to completion risk, Moody's understands that approximately 41% of the financing is associated with projects that are completed, with the remaining 59% having expected completion dates that are no later than year-end 2008. Moody's believes that compliance risk is substantially reduced upon project completion. In the event that a project is terminated and not completed, or a project does not remain compliant, the bonds issued to finance such a project can be redeemed at par by NRUC and the associated tax credit will terminate upon such redemption. Additionally, if any of the qualified borrowers default on their loan with NRUC, no additional funds would be advanced to the borrower under the CREBs program and NRUC would have the right to redeem the associated bonds at par, whereupon upon redemption, the associated tax credit would terminate.

Moody's understands that of the approximate $30.52 million of CREBs being raised, NRUC intends to lend approximately $13.93 million to three electric cooperatives to finance six separate landfill gas projects, $11.48 million to an electric cooperative to finance nineteen separate solar energy projects, and approximately $5.11 million to two electric cooperatives to finance two wind projects.

NRUC's stable outlook considers an expectation of fairly modest loan growth with low risk electric distribution cooperatives representing an increasing portion of its portfolio, continued maintenance of a significant loan loss reserve, management of the telecom loan portfolio so it does not exceed 10% of total NRUC total loans, and continued use of other existing portfolio management tools that have reduced single obligor risk and enhanced overall asset liquidity. Additionally, the stable outlook assumes a reasonable outcome for a large non-performing loan exposure and an expectation of continued receipt of scheduled payments from CoServ leading to this loan returning to performing status.

For more information on NRUC, please refer to the Analysis dated December 28, 2007 and the most recent Credit Opinion dated December 20, 2007. Both can be found on moodys.com under the issuer's name.

Assignments:

..Issuer: National Rural Utilities Coop. Finance Corp.

....Senior Unsecured Regular Bond/Debenture, Assigned A2

Based in Herndon, Virginia, NRUC is a private, not for profit 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 United States Department of Agriculture. At November 30, 2007, NRUC had total assets of approximately $18.6 billion, of which loans to members represented approximately $18.3 billion. At November 30, 2007, more than 90% of NRUC's total loan portfolio was with rural electric cooperatives.

Pursuant to Section 54 of the Code, NRUC is a qualified issuer of CREBs which serve as a tax incentive to encourage certain state and local governments, cooperative electric companies, clean renewable bond lenders and Indian tribal governments to finance certain renewable energy and clean coal facilities. In 2006, the federal government increased the volume cap for CREBs to $1.2 billion, of which $750 million can be issued by governmental bodies, with the balance of $450 million allocated to cooperative electric companies. The allocation for CREBs expires on December 31, 2008.

New York
A.J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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