U.S. Central's $450 Mil. PIC Conversion Helps Level the GAAP Playing Field
Senior Vice President of Communications Austin Braithwait said U.S. Central brought the topic up with members last spring, not as a regulatory capital measure but to improve the corporate's debt ratings.
"We had to get approval from the NCUA to issue PIC II; but really, we're just converting one type of capital to another to give us more in terms of how outside entities perceive it," Braithwait said. "From an NCUA standpoint, it doesn't give us any additional total capital; we just shifted buckets."
In fact, the move is called PIC-II because U.S. Central and its members have already been around this block once before, back in 1999. At that time, U.S. Central converted $300 million of MCS to PIC and for the same reason: to boost Tier 1 capital as recognized by generally accepted accounting principles.
Corporate credit unions are a tough customer for ratings agencies, thanks to their unique business model.
"The leading rating agencies truly work to understand the unique nature of corporate credit unions, but I don't believe they have been able to shake the institutional bias in their rating formulas for the for-profit business model," said consultant Dennis Dollar.
"Corporate credit unions are difficult for them to get their arms around because they don't fit into a neat box for their matrices," Dollar continued. "Corporate credit unions' nonprofit model, capital requirements as aggregate institutions and member ownership by their individual credit union depositors-which each themselves have differing liquidity needs, risk profiles and capital levels-makes it difficult to apply a for-profit, often stock-based criteria, and make it fit."
An example of the apples-to-oranges comparisons is MCS, which qualifies as capital under NCUA regulations but isn't considered equity under GAAP, which ratings agencies follow.
The sticking point is that MCS has a three-year call feature, and balances fluctuate, Braithwaite explained. GAAP considers those features too liquid to count as capital.
"Essentially, corporates must keep 5% of their U.S. Central deposits in capital form, so MCF goes up or down based on their deposit balances," he said.
On March 18, 2008, Fitch Ratings downgraded U.S. Central's issuer default rating and senior debt rating, both falling from AAA to AA+. Fitch blamed the downgrade on U.S. Central's exposure to mortgage-backed securities and the toll any realized losses would take on capital.
"Given that the company operates with a high degree of leverage, the potential risk of losses that could impair the company's capital base is incongruent with an AAA-rated entity," wrote Senior Director Ken Ritz in Fitch's March release.
On Dec. 22, Moody's Ratings Service downgraded U.S. Central's long-term debt ratings from Aa1 to A1.
"Moody's believes that [U.S. Central's] 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," wrote Managing Director Robert Young. Young also praised U.S. Central's then-pending PIC II conversion plans.
Each member corporate, with an allocation based on daily average net assets, exchanged MCS for PIC II shares on a dollar-for-dollar basis, Braithwait said.
"Corporate CEOs had a lot of input on that topic," he said. "They determined at what level they'd participate; ultimately, it's based on assets."
He said each corporate converted the same percentage of capital based on daily average net assets at U.S. Central.
"The bigger corporates have larger dollar amounts than the smaller ones, but the applied percentage was the same," he said.
PIC II conversion was the primary topic at U.S. Central's annual member CEO roundtable; the group was able to meet several times over the past few months to finalize the details, with Braithwait reporting that all CEOs had at least one chance to share their views, in person, at U.S. Central's Kansas headquarters.