Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
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 (NYSE: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.