The $28 billion Western Corporate Federal Corporate Credit Union and the $36 billion U.S. Central Federal Credit Union took the biggest knocks, suffering downgrades to their long-term ratings. U.S. Central was downgraded from A1 to Aa1, and WesCorp was downgraded from Aa3 to A2. Additional ratings at each institution are also currently under review for possible downgrades, with analysts waiting for November and December financials to report any realized investment losses.
Moody's credited the downgrades and reviews to the potential for realized losses on U.S. Central's and WesCorp's balance sheets as a result of the lingering dislocation in the asset-backed security market.
"Although USC's securities portfolio is of relatively high quality, the extended period of illiquidity in asset-backed securities markets and rising loss expectations for these securities have resulted in substantial unrealized valuations losses of $4.6 billion as of Oct. 31, 2008," wrote Managing Director Robert Young in the ratings action press release.
"Moody's believes that these securities' economic losses will be much less severe than what is implied by the valuation losses; nonetheless, the potential for realized losses is a significant risk relative to USC's modest capital base and limited earnings," Young continued.
He cited Moody's expected loss analysis, which revealed that U.S. Central's residential mortgage-backed securities portfolio could experience economic losses, over time, in excess of current Tier 1 capital. Additionally, U.S. Central runs the risk of losing so much on investments, it would fall below regulatory capital minimums.
Young added that his assessment included U.S. Central's pending conversion of $450 million worth of membership capital shares into paid-in capital, which Moody's considers a positive move.
WesCorp's report read nearly the same as U.S. Central's, noting WesCorp's unrealized losses of $1.8 billion as of Oct. 31 and reporting that per loss analysis, WesCorp's RMBS portfolio losses could erode a significant portion of its current Tier 1 capital, and realized losses could put it at risk of breaching regulatory minimums.
Young wrote that both U.S. Central's and WesCorp's baseline credit assessments, which measure standalone credit profiles, have sunk to a level below investment grade.
Fueling the rumors that U.S. Central is too important to the credit union system to fail, Young wrote that the wholesale corporate's ratings received a boost thanks to its "central and important role" with the credit union network and has a "very high probability of systematic support from both the U.S. government and the credit union network."
Young wrote almost the exact same thing about the San Dimas, Calif.-based WesCorp, noting that a broad member base of 1,000 credit unions rely upon WesCorp for numerous services.
Both received some points for simply being credit unions, as Young added that ratings for the two "also consider the senior position of its debt obligations relative to its member shares (i.e. deposits by retail credit unions), which provides substantial added protection for creditors."
Moody's affirmed the ratings of five other corporates, but placed the Prime-1 commercial paper ratings on review at each institution for possible downgrade. The corporates include: the $8.7 billion Members United Corporate Federal Credit Union, the $5 billion Corporate One Federal Credit Union, the $2 billion Central Corporate Credit Union, the $2 billion Corporate Central Credit Union and the $2 billion SunCorp Credit Union.
"The ratings actions on the other five CCUs listed above reflect the increased stress placed upon the CCU network as a result of the global credit crisis and its impact on the liquidity and valuations of the CCUs' investment portfolios," Young wrote.
Young blamed U.S. Central, at least in part, for putting the five corporate ratings under review, writing that they have relatively less asset-backed securities exposure but have concentrated exposure to U.S. Central through member shares and member capital shares deposited there.
"Although Moody's views a potential failure of U.S. Central as a very low probability event, such an event would likely result in a loss on member capital shares that the CCUs have placed at U.S. Central," Young wrote, citing member capital share losses that occurred at Capital Corporate Federal Credit Union back in 1995.
It's been decades since some corporates dinged by the report have had their ratings changed. Central Corporate, for example, hasn't had one single ratings action since it was first assigned a short-term rating back in 1988. U.S. Central hadn't experienced any ratings action from Moody's since January 2003.
"There is no immunity from the current market dislocation," WesCorp Senior Vice President and Chief Financial Officer Jim Hayes said. "[The] action further illustrates the continuing devaluation that all financial institutions are experiencing in their portfolios."
Members United, in a Dec. 23 statement to members posted on its Web site (www.membersunited.org), noted that nearly every financial institution in the country has experienced negative ratings action recently, including household names like Bank of America, Barclays, CitiBank, Goldman Sachs, HSBC, JPMorgan and Morgan Stanley.