LENEXA, Kan. – In an effort to build long-term capital, U.S. Central FCU is notifying its corporate credit union members it is converting about $410 million of member capital share accounts to permanent capital known as paid-in-capital.
The move, which is expected to raise some controversy when the corporates meet next week in Las Vegas, is being done to satisfy the Wall Street ratings agencies which have raised concerns as unrealized losses on U.S. Central’s securities have grown to more than $6 billion.
"We’re looking for a way to stabilize our ratings," David Dickens, vice president of asset liability management at U.S. Central, told The Credit Union Journal yesterday.
The move will not consist of raising additional capital, but a reclassification of MCS, which have a three-year notice, to PIC, which is perpetual and can only be redeemed by U.S. Central. Under NCUA’s rules, both issues are considered part of U.S. Central’s regulatory capital, which currently totals $2.6 billion. But MCS is not considered capital under generally accepted accounting principles, or GAAP, so is not weighted as much by the rating agencies.
PIC, on the other hand is considered Tier One capital under GAAP.
Because of the more stringent redemption condition, U.S. Central pays a higher dividend on PIC than on MCS. That amounted to between 75 basis points and 80 bps for the third quarter, according to Dickens.
The move, coming at a time when several other corporates are reporting large losses on their mortgage securities, is expected to create some debate next week when the Association of Corporate CUs meets in Las Vegas, according to one corporate executive who spoke to The Credit Union Journal on background.
Rating agencies, including Fitch Investors and Standard & Poors, have downgraded U.S. Central in recent months because of concerns that U.S. Central will eventually have to realize some of the $6 billion in unrealized losses on its books. Dickens said they hope the capital adjustment will convince the agencies to maintain U.S. Central’s high Double A+ ratings.
