Fitch Ratings has affirmed the long- and short-term Issuer Default Ratings (IDR) of the Farm Credit System and the Federal Farm Credit Banks consolidated system debt obligations at 'AAA' and 'F1+', respectively. Today's action reflects continued stable operating performance, manageable asset quality metrics, conservative liquidity and capital management and resilient funding sources. The Rating Outlook is Stable.
Fitch affirms the ratings as follows:
Farm Credit System
--Long-term IDR at 'AAA';
--Short-term IDR at 'F1+';
--Support affirmed at '1';
--Support Floor affirmed at 'AAA'.
Federal Farm Credit Banks
--Senior Debt at 'AAA'.
The Farm Credit System (the System) is a Government Sponsored Enterprise (GSE). The System was created by Congress in 1916 to provide a reliable source of credit and liquidity to the U.S. agricultural community. Today, the System operates through 90 Associations (lenders to farmers, ranchers and other qualified borrowers), which are cooperatively owned and are organized within five Banks (the Banks). The Banks (CoBank, ACB, AgFirst FCB, U.S. AgBank, FCB, AgriBank, FCB and Farm Credit Bank of Texas) jointly own the Federal Farm Credit Banks Funding Corporation (Funding Corp.), which acts as their agent in the issuance of Federal Farm Credit Banks Consolidated Systemwide debt. The five Banks are jointly and severally liable for the securities issued by the Funding Corp. on their behalf. As of June 30, 2009, System-wide debt outstanding totaled $180.4 billion, all of which is senior in ranking, and was comprised of $164.7 billion in bonds and medium-term notes and $15.7 billion in discount notes.
Asset quality has come under moderate pressure due to global economic weakness and acute pressure on specific agricultural sectors, such as ethanol. The System-wide ratio of non-accrual loans, accruing restructured and other property owned to loans and other property owned increased to 2.11% at June 30, 2009 from 1.46% at YE08. That said, Fitch views the level of reserves and capital, in relation to the NPAs and net charge-off experience as reasonable. With the anticipation of continued pressure on loan quality, Fitch expects higher provisioning for loan losses will partially offset favorable trends in margin income experienced through the first half of 2009. Nevertheless, even through building of loan loss reserves, the System's profitability has been sufficient to augment capital levels. Retained earnings remain the primary source of capital growth and the reliability and stability of profitability is a factor of the rating level.
As a GSE, the System fulfills an important public mission, helping to promote a healthy agricultural industry by ensuring reliable availability of credit and liquidity for creditworthy agricultural borrowers. This reliability was tested in the fourth quarter of 2008 when liquidity of highly functioning markets dried up suddenly in response to the failure of several financial institutions and the subsequent government response. Through this time of stress, the System never lost access to funding and was able to successfully issue securities on a daily basis. Despite debt spreads narrowing from the initial widening that occurred in the fourth quarter of 2008, it still remains moderately more expensive to issue debt, especially with longer durations during 2009. Neither the System nor any of its constituent entities, such as the Associations or the District Banks, are guaranteed by the U.S. government. That said, Fitch believes that if the System were in need of support, it is extremely likely that it would be provided. In the late 1980s, the System benefited from support in the form of access to funding that was issued with a guarantee from the U.S. Treasury. That debt and all associated interest has been repaid by the System.
The System has adopted prudent risk management and corporate governance standards. Strong credit underwriting and risk monitoring throughout the organization has resulted in comparably strong asset quality and reasonable interest rate risk sensitivity. The System benefits from good diversification by geography, borrower and crop/product. In addition, borrower repayment capacity is enhanced by the increasing number of borrowers with off-farm income. Loan loss reserves and very solid capital levels throughout the System's institutions provide considerable cushion. The System had combined net income of $1.3 billion in the first half of 2009 and $2.9 billion in 2008.
The Stable Outlook reflects Fitch's view that the Farm Credit System is well positioned to sustain its current financial strength even in a scenario of significant stress incremental to the current pressures exhibited on the System today.
Additional information is available at 'www.fitchratings.com'.
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Sharon Haas, CFA, 212-908-0362
Eric
Newell, CFA, 212-908-0769
or
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Bertsch, 212-908-0549
Email: brian.bertsch@fitchratings.com