Stocks & Investing
Stocks and Investing
Stocks and Investing
Tue, July 28, 2009
Mon, July 27, 2009 National Rural Utilities Cooperative Finance Corporation (NRUCFC): National Rural Comments on Fitch Ratings Action
HERNDON, VA--(Marketwire - July 27, 2009) - On July 24, 2009, Fitch Ratings (Fitch) announced a downgrade, with a "stable" outlook, on all of the secured and unsecured debt of National Rural Utilities Cooperative Finance Corporation (National Rural) (
Fitch's new ratings are as follows:
-- Senior Secured Debt: A
-- Senior Unsecured Debt: A-
-- Subordinated Debt: BBB
-- Commercial Paper: F2
The Fitch announcement focused primarily on the fact that National Rural's "funding profile has become more heavily reliant on secured funding sources" and that National Rural's leverage profile has risen over the past few years, albeit gradually. Fitch also stated that National Rural "plans to access committed secured funding sources to help retire a meaningful debt maturity of $1.2 billion that comes due in August 2009." In addition, the Fitch announcement noted that its assessment took into consideration National Rural's "solid asset quality and relatively stable core financial performance."
Liquidity
As of July 23, 2009, National Rural had $1 billion of cash and cash equivalents on hand and $1.0 billion of capacity under the seven-year revolving term debt arrangement with the Federal Agricultural Mortgage Corporation (Farmer Mac). The company also obtains liquidity through approximately $1 billion per year of principal repayments of long-term loans from borrowers. In addition, National Rural can raise debt through the sale of InterNotes and medium term note programs and may offer additional collateralized debt bonds on short notice as a "well-known seasoned issuer." Since January 1, 2009, National Rural has issued $1.1 billion of InterNotes and medium-term notes.
"We are fully confident in our ability to refinance the $1.2 billion of debt maturing in August 2009," said National Rural's Chief Financial Officer Steven Lilly. In addition, in July, National Rural repaid a $200 million term loan and repaid a $245 million medium-term note obligation that matured.
Secured vs. Unsecured Issuance
National Rural acknowledges its practice of issuing secured debt as its longstanding business model since its first collateral trust bond indenture in 1972. The issuance of secured debt has historically been a lower-cost funding option that allows the company to offer lower-cost loans to its member rural electric cooperatives.
"Our offering of collateralized debt is the most cost-effective way for National Rural to meet the obligations of our members," Lilly said. "In addition, the collateral package we offer to investors is similar to the first mortgage bonds offered by utility companies, which is something that most financial institutions are unable to offer."
Lilly also noted that National Rural "continues to successfully access the unsecured markets as needed" and cited more than $1.3 billion in unsecured term debt issuance since January 1, 2009.
Leverage
National Rural is committed to maintaining an acceptable leverage position. During fiscal year 2009, the company implemented two strategic initiatives: (1) a plan to raise additional capital from its members through the issuance of Member Capital Securities and (2) revisions to its patronage capital policy to reduce the amount returned to members each year. To date, National Rural has been highly successful in raising additional capital from its members, with nearly $320 million in these securities sold.
National Rural reduced the amount of patronage capital retired from 70 percent of the prior year allocation to 50 percent and increased the hold period for the remaining portion from 15 years to 25 years. The allocation and retirement amounts remain subject to annual approval by National Rural's board of directors, and National Rural has no obligation to retire patronage capital. "We anticipate that these actions will assist us in the reduction of the leverage ratio," Lilly added.
Underlying Financial Strength
National Rural's Governor and CEO Sheldon C. Petersen said, "The strength underlying our securities is the combined strength of our member rural electric cooperatives. The rating agencies have continued to highlight the strength of the rural electric utility industry. During this past year, we provided more than $1 billion of new capital to our rural electric members. We are well positioned to continue our mission of serving the financial needs of the nation's rural utilities."
National Rural is a cooperative that serves the nation's rural utility systems, the majority of which are electric cooperatives. With approximately $20 billion in assets, National Rural provides its member-owners with an assured source of market-priced capital and financial products and services.
This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although we believe that the expectations reflected in such forward-looking statements are based on current reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements due to a variety of known and unknown factors.
Factors that could cause future results to vary from current expectations include, but are not limited to, general economic conditions, legislative changes, governmental monetary and fiscal policies, changes in tax policies, changes in interest rates, interest expense, demand for our loan products, changes in the quality or composition of our loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic and governmental factors affecting our operations.
