SunCorp FCU got a vote of confidence from Wall Street last week in the face of a stumble in the securities market.
Standard & Poor's said it won't downgrade the corporate's top A-1+ rating on its commercial paper despite a loss of almost $6 million realized on its securities portfolio in the fourth quarter of 2004 and first quarter of 2003. The hit, almost $5 million in 2003 and $990,000 in 2004, were attributed to holdings of asset backed securities that had been downgraded below investment grade and sold at a loss.
"Although these losses are material and nearly equivalent to one year's earnings, SunCorp has taken numerous steps to strengthen its risk management and investment polices," S&P reported. "SunCorp's ample liquidity and position as an intermediary in the highly regulated corporate credit union system support its current rating. SunCorp continues to maintain a relatively low credit risk profile despite the recent losses."
The losses accrued in 2003 helped push net income for the $4-billion corporate down to just $12,005 for the fiscal year, from $4.8-million in 2002.
Eric Kenealy, CEO of the SunCorp, said they were caught because even though the securities were Triple A-rated, as required under NCUA's rules and regulations, the issuer and servicer of the bonds were not of investment grade. "We've made changes to our policies as a result of this," he said. "As a result of this event, we have improved the quality of the issuers and the servicers to investment grade or better."
The corporate has also created a new risk management program, with two full-time analysts, who report directly to the CEO, he said.
Despite the losses accrued this year, $990,961 related to the ABSs, SunCorp was still able to report $2.3 million in net income through April, according to Kenealy.
While he would not disclose what assets were included in the securities, Kenealy said the incident should serve as an important lesson for all credit unions, as Reg-Flex natural person credit unions, as well as corporates, are now allowed to invest in and purchase asset backed securities. "If any credit union is going to buy asset-backed securities they need to monitor the issuer and the servicer, as well," he said.
