Jan. 28, 2002 – The wholesale bank that has lent Innovative Communication Corp. nearly $600 million was given negative marks by all three nationally recognized financial rating organizations earlier this month.
Working separately, Standard & Poor's, Moody's and Fitch lowered their credit ratings for the National Rural Utilities Cooperative Finance Corp. (CFC) on Jan. 8, 17 and 18, respectively. For S&P, it was the second lowering of CFC's rating in 12 months.
All three firms also regarded the outlook for CFC as negative.
A lowered credit rating means that borrowers will probably pay higher interest rates to the financial institution concerned, and that the institution, in turn, will become more cautious in its lending practices. The ratings on CFC financial instruments, while lower than before, remained in the investment grades, i.e., not those of junk bonds.
Innovative was not mentioned by name in any of the organizations' reports, but it belongs to two classes of CFC borrowers that trouble the rating agencies. These are large borrowers and those in the telecommunications business. (CFC makes most of its loans to small entities, typically electric power cooperatives in rural areas.)
While Innovative is a large CFC borrower, it is not the largest. According to the most recent CFC annual report, there was $588 million in loans outstanding in the U.S. Virgin Islands. Since Innovative Communication Corp., parent company of Innovative Telephone (the former Vitelco), is the only CFC member in the U.S.V.I., this is the total owed by Innovative. It constitutes about 3 percent of CFC's total loan portfolio.
Moody's, using Wall Street speak, reported: "The rating downgrade further reflects the existence of single obligor risk … the top 10 borrowers represent 26 percent of CFC’s loan portfolio."
Thus, the other top nine CFC borrowers account for about 23 percent of that portfolio. Two of those nine, an electrical cooperative in Central Texas and a generating plant in Utah, have restructured loans, i.e., those where payments have slowed or stopped. Together these two "obligors" owe CFC about $1.5 billion.
Earlier, Standard & Poor's cited among its concerns "additional erosion in the asset quality of CFC's loan portfolio [and] … continued high credit concentration in its top 10 borrowers, and among the top 10 to telecommunications companies." S&P said it "has evaluated most of CFC's top borrowers and concluded that though they are current on debt service, many are of speculative grade in quality and some are facing credit pressures."
Whether a borrower is "current on debt service" is to some extent a matter of definition. CFC has defined the Texas and Utah entities noted above and a third, much smaller outfit working with fuel cells as non-current.
As a wholesale bank, CFC borrows in large sums on Wall Street and then lends funds in smaller amounts to rural utilities, charging them slightly higher interest rates than it pays. Located near Washington's Dulles Airport, it was created some years ago with the encouragement of the U.S. Department of Agriculture. It currently has about $19 billion out in loans.
Innovative, while not the largest borrower, has borrowed more money than all of the rural utilities in the upper right-hand corner of the nation — those in Pennsylvania, New Jersey, New York and the New England states — put together. The total loans to those organizations, according to the most recent CFC annual report, was about $530 million.
The actual ratings, each on several different types of securities, are meaningless outside the confines of the industry and demonstrate that grade inflation is not confined to Harvard University. The downgrade from Fitch, for example was to A+ — the previous rating had been AA.
The full text of the ratings reports can be found on the Internet at the CFC Investors site. The rating press releases are shown as 8K reports to the U.S. Securities and Exchange Commission.
A read of the 8K reports shows the name of CFC’s auditor as Arthur Andersen LLP.
