By Bert Ely
On Aug. 3, Fitch, one of the three major debt rating agencies, revised its Rating Outlook for Farm Credit System debt issued by the Federal Farm Credit Banks Funding Corporation “to Negative from Stable” while reaffirming its AAA/F1+ ratings respectively for long-term and short-term issued by the Funding Corporation. This big red flag, switching the FCS ratings outlook to Negative from Stable, follows Fitch’s recent revision of its Rating Outlook for U.S. Treasury Debt “to Negative from Stable.” The other two major rating agencies―Moody’s and Standard and Poor’s―have yet to issue similar warnings about a negative credit outlook for FCS debt although it is most interesting to note that S&P already rates FCS bonds as AA+, one notch below its top rating of AAA.
Fitch’s discussion of the change in its outlook for FCS debt securities highlights the funding cost advantages, and potential disadvantages, of being a GSE. Most importantly, the high credit quality attributed to FCS debt is due not to its capitalization or the credit quality of its loans and investments but to Fitch’s belief that the four FCS banks, and therefore the debt issued by the Funding Corporation on behalf of the banks, “could not exist without the funding advantage provided to them by the U.S. government’s implicit guarantee” of that debt. Ag bankers, of course, have always known how important that implicit guarantee is to the funding-cost advantage the FCS has when competing for ag loans.
Of critical importance to the continuation of the FCS’s cost advantage, Fitch stated that “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 (i.e., the federal government) and downgraded.” Any such downgrading would seriously erode, if not eliminate, the FCS’s current funding-cost advantage over commercial banks and other tax-paying competitors of the FCS.
Most interestingly, Fitch’s discussion of its ratings outlook for FCS debt made no mention of the $10 billion line of credit the Farm Credit System Insurance Corporation has had at the Treasury Department since 2014. The FCSIC, which is overseen by the three directors of the FCS’s regulator, the Farm Credit Administration, guarantees the timely payment of principal and interest on the FCS debt issued by the Funding Corporation. Since it was created, this line of credit has been renewed annually, as of Sept. 30. The creation of that line of credit reinforced the federal government’s implicit guarantee of FCS debt, which helped to narrow the spread of FCS debt over the Treasury yield curve. Although Fitch does not say as much one can reasonably assume that if that line of credit was not renewed, Fitch could reasonably conclude that Treasury’s implicit guarantee of FCS debt had been materially weakened. The FCS’s funding-cost advantage over commercial banks and other FCS competitors would then quickly weaken.
