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CU System
U.S. Central corporates in good company on ratings
WASHINGTON (12/29/08)--U.S. Central has joined a host of financial institutions receiving substantial credit rating downgrades in recent days. Moody’s Investor Services announced last week that it downgraded U.S. Central’s long-term debt rating to A1 and placed the wholesale liquidity provider’s long- and short-term debt on review for further possible downgrades. Among U.S. financial institutions, U.S. Central is far from alone in seeing its ratings reduced amid the historic dislocation in global credit markets. Just last week, Standard & Poor’s issued multiple downgrades for several large global banks, ranging from Bank of America and Citibank to Goldman Sachs and the Royal Bank of Scotland. Conversely, U.S. Central remains just one of three depository institutions rated at AA+, now the highest rating S&P bestows on any U.S. financial institution, U.S. Central said.. Moody’s action last Monday targeted growing unrealized losses that have emerged on U.S. Central’s balance sheet. The losses stem from the declining market values of debt securities, primarily mortgage-backed securities, in its investment portfolio. However, Moody’s acknowledged that those unrealized losses considerably overstate potential real losses. While a small portion of U.S. Central’s securities may not pay off completely, and therefore represent a realized loss, the only way that the bulk of the unrealized losses will become realized is if U.S. Central sells securities in the current weakened market. U.S. Central repeatedly has emphasized it does not intend take such action. “The vast majority of the securities owned in our portfolios continue providing consistent cash flow in the form of regularly scheduled principal and interest payments,” said Francis Lee, CEO of U.S. Central. “We continue to put these bonds through ongoing rigorous analytics to determine that we are still ‘money-good.’ ” For its part, U.S. Central agreed with Moody’s on the nature of losses in its investment portfolio, stating that it believes “economic losses will be much less severe than current unrealized losses.” Those unrealized losses, of course, could reverse if the market value of securities rebound, it said. At the same time, U.S. Central likely will declare additional “other-than-temporary-impairments (OTTI)” in coming months on those securities that are not expected to pay off completely. These charges will have the effect of reducing earnings and regulatory capital. The likelihood of such impairments contributed to Moody’s downgrades, U.S. Central said. “We have told our members that we are likely to experience realized losses in our portfolio in 2008,” Lee said. “Based on our analysis and on that of third party experts, we believe that any OTTI will be manageable in relation to current earnings and retained earnings, but we’re still finalizing our assessments.” U.S. Central noted that 82.2% of its investment securities portfolio remain rated AAA or AA. It has managed to maintain that high level of quality despite the narrowing availability of debt securities boasting those ratings, it said. Since the credit crisis began in mid-2007, ratings agencies have downgraded more than 50,000 residential mortgage-backed securities (RMBS), representing more than half of all RMBS issued between 2005 and 2007. Prior to 2005, there were typically less than 500 downgrades in a year. Several corporates also received ratings actions last week. WesCorp was one of two corporate entities with long-term debt ratings that were reviewed. “There is no immunity from the current market dislocation,” said Jim Hayes, WesCorp senior vice president and chief financial officer, when the ratings were announced Dec. 22. “Today’s action further illustrates the continuing devaluation that all financial institutions are experiencing in their portfolios.” Hayes noted that 100% of the securities in WesCorp’s portfolio were government-backed or were rated AAA or AA, the two highest rating categories, at the time of purchase. Moody’s acknowledged that WesCorp’s securities portfolio is of “relatively high quality.”


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