LENEXA, Kan. -
The move will make it more costly for U.S. Central to borrow money on the credit markets, raising concerns by the rating agency, which noted the thin margins on which U.S. Central usually operates.
“With the housing market weakening to levels not seen since the early 1990s down-cycle, we expect U.S. Central’s large portfolio of mortgage-related securities to further decline in value,” said Robert Hoban, the S&P analyst responsible for the downgrade. “Earnings and capital measures already are under pressure.”
The S&P downgrade came a week after Fitch Ratings downgraded U.S. Central’s overall rating outlook from “stable” to “negative” because of its exposure to the mortgage markets.
Goal To Deal With Losses Now
U.S. Central is the corporate credit union for the nation’s corporate credit union network and manages more than $45 billion of credit union funds. About half of U.S. Central’s $40 billion investment portfolio is in mortgage backed securities.
Losses on its mortgage-backed securities (MBS) pushed down net income for the year by 89%, to $6.9 million, from $62.9 million in 2006.
David Dickens, chief financial officer for U.S. Central, said the corporate hopes that by writing down the value of some of their mortgage backed securities and realizing some losses on them, they have dealt with most of their problems, and they don’t expect the losses to affect the services they provide for 26 corporate credit union members, in either lower dividend rates or higher fees.
“We can’t predict what’s going to happen in the fixed-income market over the next few months,” said Dickens. “But we can predict the market will return to normalcy and we feel confident we will get paid all interest and principal on our investments.”
The major problems in the portfolio occurred last August when the mortgage market was in full meltdown. That’s when U.S. Central realized a $38-million loss on $104 million in MBSs.
It was also when U.S. Central was forced by the declining market to buy back an off-balance sheet asset-backed commercial paper conduit from its investors. At the time, U.S. Central was the manager and liquidity provider for the $3.8-billion conduit, which was funded by asset-backed commercial paper issued in the capital markets.
That’s when the market for asset-backed commercial paper froze up, forcing U.S. Central to buy back the paper when it came due.
The ABCP conduit has an unrealized loss of $31 million, which U.S. Central hopes to amortize over the remaining 4.5-year average of the securities. In addition, U.S. Central has an unrealized loss of $27 million on commercial mortgage backed securities.
The corporates’ corporate told its members that of the $96 million in real or projected losses, only $38 million represent permanent losses, while the remaining $58 million unrealized losses that may be recouped if the mortgage market recovers.
Dickens notes that only 1.8% of U.S. Central’s $40 billion in marketable securities are subprime mortgage-related.
‘Closely Monitoring’ Situation
NCUA said last week it is closely monitoring conditions at U.S. Central. especially because of the crisis in the mortgage market.
NCUA’s corporate examiners said marketable securities held by U.S. Central and other corporate credit unions are of very high credit quality. About 95% of U.S. Central’s long-term marketable securities are rated AAA with the remaining 5% being rated AA, according to NCUA.
