Fitch Affirms Farm Credit System and Farm Credit System Banks Ratings; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Farm Credit System's (FCS) long-term Issuer Default Rating (IDR) and short-term IDR at 'AAA/F1+' respectively. The Rating Outlook is Stable.

Furthermore, Fitch has affirmed the long-term and short-term IDRs of AgFirst, FCB, AgriBank, FCB, CoBank, ACB and Farm Credit Bank of Texas (collectively System Banks) at 'AA-/F1+'. The Rating Outlook is Stable.

These rating actions follow Fitch's affirmation of the U.S. Government's 'AAA' IDR on March 21, 2014, while also removing the Rating Watch Negative and assigning a Stable Outlook to the sovereign's ratings.

A full list of ratings follows at the end of this release.

KEY RATING DRIVERS - IDR, SUPPORT RATING & SUPPORT RATING FLOOR

As a government-sponsored entity (GSE), the FCS benefits from implicit government support. Therefore, the ratings and Rating Outlook of the FCS are directly linked to the U.S. Sovereign rating.

The affirmation of the System Bank's IDRs reflect their prudent, conservative credit culture, their unique funding advantage and their structural second-loss position on the majority of their loan portfolio. The Stable Outlook on the System Banks reflects Fitch's view that their IDRs are at their Support Rating Floor of 'AA-' and therefore are not likely to be downgraded unless Fitch changes its view of support.

These linkages are further articulated in Fitch's report 'Rating Linkages to the U.S. Sovereign Rating', dated July 18, 2011.

RATING SENSITIVITIES - IDR, SUPPORT RATING & SUPPORT RATING FLOOR

The ratings of the FCS are directly linked to the U.S. sovereign rating and will continue to move in tandem. If at some point in the future, Fitch views government support as being reduced, the ratings of the GSEs may be delinked from the sovereign and downgraded.

The ratings of the four System Banks are not directly tied to the ratings of the U.S. Sovereign. However, their long-term IDRs incorporate the fact that they have a unique funding source, tied to the U.S. Sovereign rating, which gives them a competitive advantage in the agricultural lending space.

The System Banks' support floors reflect the high likelihood of support from the U.S. government. Fitch views the likelihood of support at the bank level to be incrementally greater than for systemically important commercial banks given the banks' public mission and GSE status. Given that their long-term IDRs are currently at their rating floors, Fitch considers a downgrade to the System Banks unlikely.

The System Banks, collectively, are a dominant player in the agricultural lending market and their individual loan portfolios are highly concentrated in the agricultural sector. The performance of these loans has been relatively strong over recent periods due to a well-performing farm economy and the System Banks' prudent underwriting culture. For instance, as farmland values have continued to rise, System Banks and their respective Associations have underwritten using loan-to-value limits of 65% for the most part or have used debt caps per acre based on a sustainable cash crop price. However, if current trends in the farm economy reverse causing an adverse impact on asset quality as well as earnings and capital, ratings could be pressured.

Fitch will continue to monitor the System Banks' access to funds at the system-wide level. To the extent that Fitch observes deterioration in the banks' funding advantage, negative rating action could ensue. This decision would be made independent of any rating action taken at the U.S. Sovereign level. Fitch notes that the system maintained adequate access to funds at reasonable costs while the U.S. was approaching the debt ceiling

The System Banks' ratings are at the top of the scale with very few financial institutions having higher ratings. Therefore, positive rating action is unlikely.

KEY RATING DRIVERS - Subordinated Debt and Other Hybrid Securities

Bank subordinated debt and hybrid securities, are typically notched down from the issuing entity's Viability Rating (VR). However, Fitch believes the System Banks could not exist without the funding advantage provided to them by the U.S. Government's implicit guarantee. Therefore, Fitch has not assigned a VR to any of the System Banks.

To be clear, the hybrid capital issuances by the individual System Banks are not implicitly guaranteed by the U.S. Government, are not joint and several obligations of the System Banks and are not covered by the Farm Credit System Insurance Corporation (FCSIC). Furthermore, Fitch's ratings on the hybrid instruments assume no support from the Federal Government. Nonetheless, Fitch believes that these securities benefit from the safeguards of the FCS, such as the CIPA and MAA, which enforce early warning and discipline on the System Banks.

RATING SENSITIVITIES - Subordinated Debt and Other Hybrid Securities

In the absence of a VR the issuances are notched from the entity's long-term IDR. The notch differential reflects an assessment of loss severity of the preferred issuance relative to the average recoveries assumed for a typical bank senior debt instrument. The differential is also indicative of incremental non-performance risk.

In this case, the instruments are rated four and five notches lower than the System Banks' long-term IDR. Fitch would likely depart from this standard notching, while maintaining the long-term IDR, in the event any or all of the System Banks' credit profiles worsened. However, the System Banks' subordinated debt and preferred ratings are primarily sensitive to any change in their long-term IDRs.

Fitch has affirmed the following ratings:

Farm Credit System

--Long-term IDR at 'AAA'; Outlook Stable;

--Short-term IDR at 'F1+';

--Short-term debt at 'F1+';

--Support at '1';

--Support floor at 'AAA'.

Federal Farm Credit Banks

--Senior unsecured bonds at 'AAA';

--Senior unsecured notes at 'AAA';

--Short-term debt at 'F1+'.

Agfirst, FCB

--Long-term IDR at 'AA-'; Outlook Stable;

--Short-term IDR at 'F1+';

--Support at '1';

--Support floor at 'AA-';

--Non-cumulative preferred at 'BBB'.

CoBank, ACB

--Long-term IDR at 'AA-'; Outlook Stable;

--Short-term IDR at 'F1+';

--Support floor at 'AA-';

--Support at '1';

--Non-cumulative preferred at 'BBB';

--Subordinated debt at 'A+'.

Agribank, FCB

--Long-term IDR at 'AA-'; Outlook Stable;

--Short-term IDR at 'F1+';

--Support at '1';

--Support floor at 'AA-';

--Subordinated debt at 'A+'

--Non-cumulative preferred at 'BBB'.

Farm Credit Bank of Texas, FCB

--Long-term IDR at 'AA-'; Outlook Stable;

--Short-term IDR at 'F1+';

--Support at '1';

--Support floor at 'AA-';

--Subordinated debt at 'A+'

--Non-cumulative preferred at 'BBB'.

Additional information is available 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms' (Dec. 18, 2013);

--'Rating Linkages to the U.S. Sovereign Rating' (July 18, 2011);

--'Fitch Affirms United States at 'AAA'; Outlook Stable' (March 21, 2014);

--'Farm Credit Asset Quality Solid Despite Crop Price Fall' (Aug. 21 2013);

--'Minimal Credit Impact from New US Farm Bill' (Jan. 31 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695715

Rating Linkages to the U.S. Sovereign Rating
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646469

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824664

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst - Farm Credit System, System Banks
Christopher Wolfe, +1-212-612-0771
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst - Farm Credit System
Joo-Yung Lee, +1-212-612-0560
Managing Director
or
Secondary Analyst - System Banks
Bain K. Rumohr, CFA, +1-312-368-3153
Director
Committee Chairperson
Nathan Flanders, +1-212-908-0827
Managing Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst - Farm Credit System, System Banks
Christopher Wolfe, +1-212-612-0771
Managing Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst - Farm Credit System
Joo-Yung Lee, +1-212-612-0560
Managing Director
or
Secondary Analyst - System Banks
Bain K. Rumohr, CFA, +1-312-368-3153
Director
Committee Chairperson
Nathan Flanders, +1-212-908-0827
Managing Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com