Egan-Jones Downgrade Could Devastate National Rural Utilities - Barron's

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Trouble in the Heartland? by Tom Sullivan

Summary: WorldCom and Enron whistleblower, independent credit rating agency Egan-Jones, says lender National Rural Utilities Cooperative Finance Corp.'s (NRN) bonds should not be rated investment grade single-A as ratings agencies Moody's, S&P and Fitch believe -- but rather grade B junk. Egan-Jones says NRN, dubbed 'CFC,' shows declining net loan interest income (the difference between what it earns on loans and the interest it pays on borrowings) -- from $300 million in 2002 to $20.9 million in the first 9 months of 2007 -- just 0.1% of net loans. Fellow single-A-rated financial company CIT Group (CIT) enjoys 4.8% net interest income. CFC's non-existant loan loss provisions shocks Egan-Jones: CFC's SEC filing indicated $1 billion of its $17b portfolio are troubled loans. CFC counters that almost all loans are sheltered by assets and other metrics like the borrower's revenue flow, $611m in cash reserves and $3.3b in revolving credit facilities, and that its primarily electric utilities-based loans are a sure thing. CFC financials indicate $40.97m in derivative earnings, but Egan-Jones says without one-time derivatives and with some loan loss provisions, CFC's $52.2m in earnings should more closely resemble last year's $21.9m loss. A CFC downgrade, not to mention a seven-notch move from A to single-B-plus, will affect its 7.45%/share yield as well as the rate at which it can raise and lend money.

Comments

[Robert T:]

Unfortunately, these Barron's writers do no realize that CFC is unique and cannot be compared with investor-owned utilities or finance companies. CFC is lending to the many cooperative-owned utilities in every state of the Union and should be recognized as gilt-edged. I have followed and understood this wonderful organization for over 20 years.

2008 Jul 15 03:49 PM

[User 378162:]

Egan Jones has rated many other organizations like ENRON differently than the other 3 major rating agencies. This is probably due to the fact that Egan Jones is the only agency you can't pay to get a rating. CFC has been an accounting fraud for a number of years. It's reporting of two major credit problems ( COSERV and ICC ) when researched from public information will show close to a 600M loss that is not recorded by CFC. They do this through accounting treatments originally developed by AA. They also use Texas law firms that have ties to ENRON. If CFC is forced to report loans consistent with GAAP they would be gone overnight. Egan Jones it seems has just hit the tip of the iceberg. I encourage you to dig deeper.

Mar 17 05:42 PM