Fitch Affirms Farm Credit System and Farm Credit System Banks Ratings; Outlook Remains Stable
(The following statement was released by the rating agency) CHICAGO, April 12 (Fitch) Fitch Ratings has affirmed the Farm Credit System's (FCS) Long-Term Issuer Default Rating (IDR) and Short-Term IDR at 'AAA/F1+' respectively. The Rating Outlook is Stable. In addition, 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 Rating Outlook as described in the press release dated April 11, 2017. A full list of ratings follows at the end of this release. KEY RATING DRIVERS IDRs, SUPPORT RATING & SUPPORT RATING FLOOR 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. These linkages are further articulated in Fitch's report 'Rating Linkages to the U.S. Sovereign Rating', dated July 18, 2011. The affirmation of the System Bank's IDRs reflects their prudent, conservative credit culture and their unique funding advantage. Moreover, Fitch views their structural second-loss position on the majority of their loan portfolio as a significant factor in supporting such a high rating. 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. The System Banks, collectively, continue to be 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. Moreover, the structural second-loss position of the System Banks' loan portfolio creates a notable buffer between potential credit issues at the farmer level and a System Banks' earnings and capital. In March 2016, the System's regulator, the Farm Credit Administration (FCA), approved its final rule on a new capital framework for the FCS and System Banks. The new rule became effective Jan. 1, 2017. In Fitch's view, this was primarily done to more closely align the System's capital requirements with commercial bank regulation (Basel III). The FCS and System Banks are subject to risk-based capital ratios, including a CET1 requirement of 4.5%, a Tier 1 requirement of 6%, and a Total Capital Ratio requirement of 8%, plus an additional 2.5% capital conservation buffer. The capital conservation buffer will be phased-in over three years. The FCS and System Banks will also be subject to a new Tier 1 leverage ratio minimum of 4% with a 1% leverage buffer. There will not be a phase-in for this buffer. Fitch continues to believe that the FCS and System Banks will be compliant with the new framework's requirements. This belief is incorporated into today's rating action. 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 continues to believe 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 does not differentiate the ratings of the hybrid issuances due to mutual support mechanisms in place including the Market Access Agreement (MAA) and Contractual Interbank Performance Agreement (CIPA), which provide early warning signals of problems within the system and discipline on the System Banks. RATING SENSITIVITIES IDRs, 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. Fitch expects the softening farm economy and farmland prices to have an adverse impact on each System Bank's asset quality in the near to medium term. However, credit losses should be manageable given the aforementioned second-loss position that the System Banks are in with the majority of their loan portfolios. However, if asset quality as well as earnings and capital ratios were to deteriorate such that joint and several agreements or government support were to be acted on, ratings could be pressured, although this is seen as an unlikely event. Fitch also 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 has historically maintained adequate access to funds at reasonable costs, even during periods of market uncertainty. The System Banks' support floors reflect the high likelihood of support from the U.S. government 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. 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 at '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 at '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'. 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-'; --Non-cumulative preferred at 'BBB'. Contact: Primary Analyst Bain K. Rumohr, CFA Director +1-312-368-3153 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Christopher Wolfe Managing Director +1-212-908-0771 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 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. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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