FITCH RATING – NEW YORK - Fitch Ratings has affirmed the Farm Credit System's (FCS) Long-term Issuer Default Rating (IDR) and Short-term IDR at 'AAA/F1+', with a Stable Outlook.
Furthermore, Fitch has affirmed the Long- and Short-term IDRs of AgFirst, FCB; AgriBank, FCB; CoBank, ACB; and Farm Credit Bank of Texas (collectively the System Banks) at 'AA-/F1+' with a Stable Outlook.
These rating actions follow Fitch's affirmation of the U.S. Government's 'AAA' IDR and Stable Outlook as described in Fitch's press release dated Sept. 19, 2014.
A full list of ratings follows at the end of this release.
As a government-sponsored entity (GSE), the FCS benefits from implicit government support. Therefore, the ratings and Rating 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 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.
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 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 price. However, if current trends in the farm economy reverse, resulting in an adverse impact on asset quality as well as earnings and capital, ratings could be pressured.
Fitch will continue to monitor 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 while the U.S. was approaching the debt ceiling.
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.
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.
To be clear, 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 CIPA and MAA, which enforce early warnings and discipline of the System Banks.
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
Federal Farm Credit Banks Funding Corporation
Farm Credit Bank of Texas, FCB
Primary Analyst - Farm Credit System, System Banks
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
Secondary Analyst - Farm Credit System
Secondary Analyst - System Banks
Bain K. Rumohr, CFA
Additional information is available www.fitchratings.com.
'Fitch Affirms United States at 'AAA'; Outlook Stable' (Sep. 19, 2014)
'Farm Credit System and Farm Credit System Banks' (May, 5 2014)
'Global Financial Institutions Rating Criteria' (Jan. 31, 2014)
'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014)
'Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms' (Dec. 18, 2013)
'Farm Credit Asset Quality Solid Despite Crop Price Fall' (Aug. 21 2013)
'Rating Linkages to the U.S. Sovereign Rating' (July 18, 2011)
Rating Linkages to the U.S. Sovereign Rating
Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms – Effective 11 April 2012 to 20 Dec 2012
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
Global Financial Institutions Rating Criteria