Fitch Affirms Farm Credit System and Farm Credit System Banks' Ratings; Outlook Stable
Fitch Ratings April 21, 2015
NEW YORK/BUENOS AIRES – Fitch Ratings has affirmed Farm Credit System's (FCS) Long-term and Short-term Issuer Default Rating (IDR) at 'AAA/F1+' respectively.
Furthermore, Fitch has affirmed the Long-term and Short-term IDRs of AgFirst, FCB, AgriBank, FCB, CoBank, ACB and Farm Credit Bank of Texas (collectively 'System Banks') at 'AA-/F1+'.
The Rating Outlook is Stable.
These rating actions follow Fitch's affirmation of the U.S. Government's 'AAA' IDR and Stable Outlook as described in the press release dated April 13, 2015.
A full list of ratings follows at the end of this release.
Key Rating Drivers – Idr, Support Rating & Support Rating Floor
As a government-sponsored entity (GSE), the FCS benefits from implicit government support. Therefore, the ratings and Outlook of the FCS are directly linked to the U.S. Sovereign rating.
The affirmation of the System Bank's IDRs reflect their prudent, conservative credit culture, their unique funding advantage and their structural second-loss position on the majority of their loan portfolio. The Stable Outlook on the System Banks reflects Fitch's view that their IDRs are at their Support Rating Floor of 'AA-' and therefore are not likely to be downgraded unless Fitch changes its view of support.
These linkages are further articulated in Fitch's report 'Rating Linkages to the U.S. Sovereign Rating', dated July 18, 2011.
Rating Sensitivities – Idr, Support Rating & Support Rating Floor
The ratings of the FCS are directly linked to the U.S. sovereign rating and will continue to move in tandem. If at some point in the future, Fitch views government support as being reduced, the ratings of the GSEs may be delinked from the sovereign and downgraded.
The ratings of the four System Banks are not directly tied to the ratings of the U.S. Sovereign. However, their long-term IDRs incorporate the fact that they have a unique funding source, tied to the U.S. Sovereign rating, which gives them a competitive advantage in the agricultural lending space.
The System Banks' support floors reflect the high likelihood of support from the U.S. government. Fitch views the likelihood of support at the bank level to be incrementally greater than for systemically important commercial banks given the Banks' public mission and GSE status. Given that their long-term IDRs are currently at their rating floors, Fitch considers a downgrade to the System Banks unlikely.
The System Banks, collectively, are a dominant player in the agricultural lending market and their individual loan portfolios are highly concentrated in the agricultural sector. The performance of these loans has been relatively strong over recent periods given due to a well-performing farm economy and the System Banks' prudent underwriting culture. For instance, as farmland values have continued to rise, System Banks and their respective Associations have underwritten using loan-to-value limits of 65% for the most part or have used debt caps per acre based on a sustainable cash crop prince. However, if current trends in the farm economy reverse causing an adverse impact on asset quality as well as earnings and capital, ratings could be pressured.
Fitch evaluates the System Banks' access to funds at the system-wide level. To the extent that Fitch observes deterioration in the Banks' funding advantage, negative rating action could ensue. This decision would be made independent of any rating action taken at the U.S. Sovereign level. Fitch notes that the System maintained adequate access to funds at reasonable costs, even during periods of market uncertainty.
The System Banks' ratings are at the top of the scale with very few financial institutions having higher ratings. Therefore, positive rating action is unlikely.
Key Rating Drivers – Subordinated Debt And Other Hybrid Securities
Bank subordinated debt and hybrid securities, are typically notched down from the issuing entity's Viability Rating (VR). However, Fitch believes the System Banks could not exist without the funding advantage provided to them by the U.S. Government's implicit guarantee. Therefore, Fitch has not assigned a VR to any of the System Banks.
Specifically, the hybrid capital issuances by the individual System Banks are not implicitly guaranteed by the U.S. Government, are not joint and several obligations of the System Banks and are not covered by the Farm Credit System Insurance Corporation (FCSIC). Furthermore, Fitch's ratings on the hybrid instruments assume no support from the Federal Government. Nonetheless, Fitch believes that these securities benefit from the safeguards of the FCS, such as the Contractual Interbank Performance Agreement (CIPA) and Market Access Agreement (MAA), which enforce early warning and discipline on the System Banks.
Rating Sensitivities – Subordinated Debt And Other Hybrid Securities
In the absence of a VR the issuances are notched from the entity's long-term IDR. The notch differential reflects an assessment of loss severity of the preferred issuance relative to the average recoveries assumed for a typical bank senior debt instrument. The differential is also indicative of incremental non-performance risk.
In this case, the instruments are rated four and five notches lower than the System Banks' long-term IDR. Fitch would likely depart from this standard notching, while maintaining the long-term IDR, in the event any or all of the System Banks' credit profiles worsened. However, the System Banks' subordinated debt and preferred ratings are primarily sensitive to any change in their long-term IDRs.
Fitch has affirmed the following ratings:
Farm Credit System
- Long-term IDR at 'AAA'; Outlook Stable
- Short-term IDR at 'F1+'
- Short-term Debt 'F1+'
- Support at '1'
- Support floor at 'AAA'
Federal Farm Credit Banks Funding Corporation
- Senior unsecured bonds at 'AAA'
- Senior unsecured notes at 'AAA'
- Short-term Debt 'F1+'
Agfirst, FCB
- Long-term IDR at 'AA-'; Outlook Stable
- Short-term IDR at 'F1+'
- Support at '1'
- Support floor at 'AA-'
- Non-Cumulative Preferred at 'BBB'
CoBank, ACB
- Long-term IDR at 'AA-'; Outlook Stable
- Short-term IDR at 'F1+'
- Support at '1'
- Support floor at 'AA-'
- Subordinated debt at 'A+'
- Non-Cumulative Preferred at 'BBB'
Agribank, FCB
- Long-term IDR at 'AA-'; Outlook Stable
- Short-term IDR at 'F1+'
- Support at '1'
- Support floor at 'AA-'
- Non-Cumulative Preferred at 'BBB'
- Subordinated debt at 'A+'
Farm Credit Bank of Texas, FCB
- Long-term IDR at 'AA-'; Outlook Stable
- Short-term IDR at 'F1+'
- Support at '1’
- Support floor at 'AA-'
- Subordinated debt at 'A+'
- Non-Cumulative Preferred at 'BBB'
Contact:
Primary Analyst - Farm Credit System, System Banks
Christopher Wolfe
Managing Director
+1-212-612-0771
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY
Secondary Analyst - Farm Credit System
Joo-Yung Lee
Managing Director
+1-212-612-0560
Secondary Analyst - System Banks
Bain K. Rumohr, CFA
Director
+1-312-368-3153
Committee Chairperson
Doriana Gamboa
Senior Director
+1-212-612-0865
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.
Applicable Criteria and Related Research:
- 'Global Bank Rating Criteria' (March 20, 2015)
- 'Rating Linkages to the U.S. Sovereign Rating' (July 18, 2011)
- 'Farm Credit System and Farm Credit System Banks' (May, 5 2014)
Applicable Criteria and Related Research:
U.S. Farm Credit System and Farm Credit System Banks
Global Bank Rating Criteria
Rating Linkages to the U.S. Sovereign Rating
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