Fitch Ratings has completed a review of the Farm Credit System (FCS) and the four Farm Credit System Banks. Based on this review, Fitch has affirmed the FCS' long-term Issuer Default Rating (IDR) at 'AAA' and assigned it a short-term debt rating of 'F1+'.
Fitch has also affirmed the long-term and short-term IDRs of CoBank, Agribank, Agfirst, and Farm Credit Bank of Texas (collectively 'System Banks') at 'AA-' and 'F1+'.
The Rating Outlook on the FCS is Negative, while the Rating Outlook on the System Banks is Stable. A full list of ratings is available at the end of this release.
The Negative Rating Outlook on the FCS reflects its linkage to the U.S. Sovereign rating, which Fitch revised to Negative on Nov. 28, 2011. As a government sponsored entity (GSE) the FCS benefits from implicit government support, and therefore its rating and Outlook are directly tied to that of the U.S. government. The Stable Outlook on the System Banks reflects the view that their IDRs are at their Support Rating Floor of 'AA-' and therefore are not likely to be downgraded unless Fitch changes its view of support.
The affirmations of the ratings of the four Farm Credit System Banks reflects their prudent credit culture, unique funding advantage, and structural second loss position on the majority of their portfolio. The performance of the underlying agricultural loans has been superior to other agricultural lenders and is a key factor in Fitch's assessment of the banks' prudent credit culture.
The falling interest rate environment in recent years has allowed all of the System Banks to call debt and issue at lower rates which has inflated earnings. Fitch views this performance as unsustainably high and expects that the coming years will result in earnings more in line with historical experience.
Despite the fact that the only debt that is legally joint and several are system wide debt securities, Fitch does not differentiate the ratings of the individual System Banks due to the mutual support mechanisms in place including the Market Access Agreement (MAA) and Contractual Interbank Performance Agreement (CIPA), which provide early warning of problems within the system and discipline on the System Banks.
Fitch expects that, in the event of credit stress unique to a specific system bank, the weaker entities would be assisted by the stronger. Therefore, Fitch equalizes all of the banks' ratings at 'AA-' despite differences in individual banks' credit culture, concentrations, operating environment and earnings profiles.
Typically financial institutions with hybrid capital instruments would be assigned a Viability Rating (VR) from which the hybrid capital instruments could be notched. However, the System Banks could not exist without the funding advantage provided to them by the U.S. Government's implicit guarantee. Given this unique funding/support situation, Fitch has deviated from its financial institution criteria and not assigned VR to the individual System Banks.
To be clear, the hybrid capital issuances by the individual System Banks are not implicitly guaranteed by the U.S. Government, are not joint and several obligations of the System Banks and are not covered by the Farm Credit System Insurance Corporation (FCSIC). Furthermore, Fitch's ratings on the hybrid instruments assume no support from the Federal Government. Nonetheless, Fitch believes that these securities benefit from the safeguards of the FCS, such as the CIPA and MAA, which enforce early warning and discipline on the System Banks.
Fitch would likely depart from its standard four to five notches on its preferred ratings, while maintaining the long-term IDR, in the event any or all of the System Banks' credit profiles worsened.
The System Banks, collectively, are a dominant player in the agricultural lending market and their individual loan portfolios are highly concentrated in the agricultural sector. Accordingly, significant negative developments in the agricultural industry could pressure their ratings. Additionally, a protracted disruption in the banks' access to funding at favorable terms would also pressure ratings.
Discussion of GSE reform has generally been isolated to the two housing entities and Fitch does not anticipate changes to the FCS' status or support as a GSE. However, the FCS and System Banks ratings are dependent on their unique and favorable funding structure. Should the FCS' status as a GSE change, negative rating pressure on all ratings would be expected.
While the ratings of the four System Banks are not directly tied to the ratings of the U.S. Sovereign, their long-term IDRs incorporate the fact that the System Banks have a uniquely advantageous funding source which is formally tied to the U.S. Sovereign's credit worthiness. Fitch does not anticipate the future potential downgrade of the U.S. Sovereign to directly drive a downgrade of the four System Banks.
Fitch will monitor the banks' access to funds at the system wide level. In the event the banks' funding advantage deteriorates, a downgrade would be warranted. This decision would be made independent of any rating action taken at the U.S. Sovereign level.
However, the system wide, joint and several, senior debt is directly tied to the U.S. Sovereign and would be affected by a change in Fitch's rating of the U.S. government.
The system's ratings are at the top of the scale, and there are very few financial institutions with higher ratings than the System Banks. Therefore, positive rating actions are considered unlikely.
Fitch has revised the support floors for the individual banks to 'AA-', reflecting the System Banks' high likelihood of support from the Federal Government. Fitch views the likelihood of support at the bank level to be incrementally greater than for systemically important commercial banks given the System Banks public mission and GSE status. Given the long-term IDRs are at their support floors, a downgrade is considered unlikely.
The Farm Credit System is a cooperative system owned by its member/borrower associations. It was created by an act of Congress in 1916 to provide a reliable source of credit and liquidity to the agricultural community. Collectively, the system had approximately $230 billion in total assets and $185 billion in total system wide debt securities at Dec. 31, 2011.
Fitch has affirmed the following ratings with a Negative Outlook:
Farm Credit System
--Long-term IDR at 'AAA';
--Short-term IDR at 'F1+';
--Support at '1';
--Support floor at 'AAA'.
Federal Farm Credit Banks
--Senior unsecured bonds at 'AAA';
--Senior unsecured notes at 'AAA'.
Fitch has assigned the following rating:
Farm Credit System
--Short-term debt 'F1+'.
Fitch has affirmed the following ratings with a Stable Outlook:
CoBank, ACB
--Long-term IDR at 'AA-';
--Short-term IDR at 'F1+';
--Support at '1';
--Cumulative Preferred at 'BBB+';
--Non-Cumulative Preferred at 'BBB';
--Subordinated debt at 'A+'.
Agribank, FCB
--Long-term IDR at 'AA-';
--Short-term IDR at 'F1+';
--Support at '1';
--Subordinated debt at 'A+'.
Agfirst, FCB
--Long-term IDR at 'AA-';
--Short-term IDR at 'F1+';
--Support at '1';
--Non-Cumulative Preferred at 'BBB'.
Farm Credit Bank of Texas, FCB
--Long-term IDR at 'AA-';
--Short-term IDR at 'F1+';
--Support at '1';
--Subordinated debt at 'A+'
--Cumulative Preferred at 'BBB+'.
--Non-Cumulative Preferred at 'BBB'.
Fitch has revised the following ratings with a Stable Outlook:
CoBank, ACB
--Support floor to 'AA-' from 'A'.
Agribank, FCB
--Support floor to 'AA-' from 'A'.
Agfirst, FCB
--Support floor to 'AA-' from 'A'.
Farm Credit Bank of Texas, FCB
--Support floor to 'AA-' from 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Criteria' (Aug. 15, 2012);
--'Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms' (April 11, 2011);
--'Rating Linkages to the U.S. Sovereign Rating' (July 18, 2011);
--'Viability Ratings: An Introductory Primer' (July 20, 2011);
--'Drought's Impact on U.S. Farm Credit Manageable for Now' (Aug. 15, 2012);
--'Rapid Farmland Appreciation Poses Risk for Ag Lenders' (Sept. 4, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=666999
Rating Linkages to the U.S. Sovereign Rating
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646469
Viability Ratings: An Introductory Primer
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=645609
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst - Farm Credit System
Joo-Yung
Lee, +1 212-908-1560
Managing Director
Fitch, Inc.
One
State Street Plaza
New York, NY 10004
or
Primary Analyst
- System Banks
Christopher Wolfe, +1 212-908-1771
Managing
Director
Fitch, Inc.
One State Street Plaza
New York, NY
10004
or
Secondary Analyst - System Banks
Brandon Bajema,
CFA, CPA, +1 312-306-2332
Associate Director
or
Committee
Chairperson
Joe Scott, +1 212-908-1624
Senior Director
or
Media
Relations:
Brian Bertsch, +1 212-908-0549
Email: brian.bertsch@fitchratings.com