WALL STREET – Fitch Ratings, citing continued risk in the investment portfolio at U.S. Central FCU, downgraded both the senior debt and the overall issuer default rating for the credit union central bank yesterday.
The Wall Street rating firm downgraded the senior debt for U.S. Central to AA+ from its top AAA, and the issuer default rating to AA+ from AAA. It also placed the ratings on a Negative Ratings Watch, indicating the possibility for further downgrade.
“The downgrades reflect Fitch’s concern of an increasing probability that USC could realize meaningful losses on its investment book,” said Fitch. “Given that the company operates with a high degree of leverage, the potential risk of losses that could impair the company’s capital base is incongruent with a ‘AAA’ rated entity.”
The action comes as U.S. Central continues to struggle with a portfolio of asset-backed securities that are deteriorating with the falling market. U.S. Central said the market value loss on its portfolio grew to $1.4 billion at January 31, from $1.14 billion at year end.
Fitch placed U.S. Central on Rating Watch Negative because of the uncertainty of the size of any prospective losses, according to Kenneth Ritz, the Fitch analyst responsible for the rating. “Most of what is on their books is unrealized losses,” he told The Credit Union Journal yesterday. “We’re concerned with the likelihood of them realizing additional losses.”
“It’s the risk that there could be losses of some magnitude that could impair their capital,” said Ritz, of the downgrades.
The downgrades should make it more costly for U.S. Central to borrow in the credit markets, but not by much because AA+ rating is still high, he pointed out.
U.S. Central’s CEO, Francis Lee, noted that despite the downgrades, the AA+ rating is one of the highest afforded to U.S. financial institutions by the ratings firm. “U.S. Central is a strong, healthy financial institution with $2.4 billion in capital, access to more than $20 billion in available liquidity and a high-quality investment book,” said Lee, in a prepared statement. “The ‘AA+’ rating underscores U.S. Central’s ongoing ability to deliver on our commitment to serve the liquidity needs of the Corporate Credit Union Network.”
The Fitch move comes a month after Standard & Poor’s, another Wall Street rating agency, downgraded U.S. Central to AA+ from its top AAA (Triple A) rating, after the corporate credit union marked down the value of its $20 billion portfolio of mortgage-backed securities by a whopping $760 million.
U.S. Central is a critical liquidity provider for the credit union system and manages $45 billion in credit union funds, as well as providing loans to corporate credit unions.
