Despite Negative Watch, Fitch Ratings Says Corporates
NEW YORK -- Three corporates were placed on ratings watch negative by Fitch Ratings, but that doesn't mean the aggregates aren't a safe place for natural person credit union funds, said Ken Ritz, senior director of Fitch's banking group.
Stressed mortgage-backed securities aside, corporates have very strong management strategies, good liquidity and potentially a low-risk profile, he said.
"I want to be clear, it's not like we're saying it could impair capital to the extent that we're questioning the corporate's survival," Ritz said. "We still think they deserve those AA- ratings. We still view them as very solid companies."
Fitch placed Members United Corporate FCU on ratings watch negative May 31 and Southwestern Corporate FCU and Constitution Corporate FCU on June 13. All three institutions still maintain a AA- long-term issuer default ratings. On March 18, Fitch downgraded U.S. Central FCU's IDR from AAA to AA+.
Ritz said struggling monoline insurers, which cover the corporates' mortgage-backed securities, were one reason for the watches. "With the monoline insurers under stress, the credit enhancement corporates gathered from this support has been lessened, so there is an increased potential they could see some losses in those securities," Ritz said.
The watches have generated interest in the credit union industry because corporates rarely court risk and haven't experienced a threat of losses in quite some time, Ritz said.
"The same goes for corporates inquiring about U.S. Central as it does for natural person credit unions inquiring about corporates," Ritz said. "They're still highly rated entities and still low risk, but their investments do bear monitoring in that they do have some securities that could cause them some financial heartache."
Fitch Ratings issues two types of notices: outlooks and watches. While outlooks refer to long-term trends, negative watches are relatively short-term events that could potentially trigger a ratings downgrade.
"If these losses don't come to fruition and all over fundamental strengths are kept in tact, in most cases those ratings will be stabilized, and the watch lifted," Ritz said.
Brad Miller, executive director of the Association of Corporate Credit Unions, said he wasn't surprised that Fitch placed the corporates on ratings watch thanks to the current economic climate.
"How could you not be [on watch] under the current economic conditions?" Miller asked. "People are kind of turning this into a negative, but I see a positive message that the ratings are being maintained."
Miller said all three major ratings agencies are combing through the investment portfolios of all financial institutions, not just corporate credit unions. The ratings watches are more a sign of the economy and markets, not the state of corporate credit unions. And, it's not as bad as it sounds, he added.
"As I talk to corporates, they're watching their bonds and securities very carefully, but their portfolios are performing well; in fact, they're still getting payments on these bonds, so they don't feel the market price of these securities represents their true value," he said.
Furthermore, corporates have more than adequate liquidity resources available, which makes the threat of investment losses relatively minor, he said.
"Market liquidity is the key to all of this," Miller said. "Corporates buy securities like these with the intent to hold them to maturity. There's no way they're going to sell them for liquidity, because they have other, better sources of credit."
"I feel--and time has tested this because we've been in this kind of market going on 18 months now--I feel corporates have ample liquidity and don't have to sell these securities, which are simply feeling the influence of the supply and demand in the marketplace."
Miller said he hasn't heard any rumblings that indicate that the NCUA plans to change its regulation of mortgage-backed securities as a result of the ratings watches because the investments have historically been safe and have performed well.
"Historically, it's been a huge market for corporates, and I think it will come back," Miller said. "But, we'll just have to wait out the current environment."