WALL STREET - Fitch Ratings, citing continued exposure to the crashing mortgage market, downgraded its ratings for U.S. Central FCU last week.
Fitch cut the ratings for both the senior debt and overall issuer default for U.S. Central from its top AAA (Triple A) rating to AA+, and also placed the ratings on a Negative Ratings Watch, indicating the possibility for further downgrade.
The latest cut comes after the U.S. Central, which manages $45 billion in CU funds, 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 Jan. 31, from $1.14 billion at year-end.
The action by Fitch follows a move last month by another Wall Street ratings firm, Standard & Poors, cutting its own ratings for U.S. Central from its top AAA to AA+.
Kenneth Ritz, the Fitch analyst for U.S. Central, said the rating firm was cognizant that the unrealized losses cited by U.S. Central may not come to fruition, but if they do they would be significant, given U.S. Central’s low capital requirements. “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 an “AAA” rated entity,” he said.
While U.S. Central realized as much as $90 million of losses on its huge mortgage backed securities portfolio last year, most of that was taken from earnings, Ritz explained. Fitch is concerned if more losses are realized on the $20 billion of mortgage securities they would have to come from capital, because of U.S. Central’s already diminished earnings. U.S. Central reported net income of just $6.9 million for 2007, down from $62.9 million for the year before.
“It’s the risk that there could be losses of some magnitude that could impair their capital,” Ritz said, 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 analyst emphasized that most of what happens to the U.S. Central’s mortgage backed holdings is driven by the market, even though the the majority of the securities are themselves Triple A rated. “In most cases, the stuff is very highly rated and very secure,” he said.
