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On April 19, CFC CFO Steve Lilly held a teleconference with investors to review the third-quarter and nine-month year-to-date activity for CFC’s 2007 fiscal year that began June 1, 2006.
Lilly thanked investors for their long-term support of CFC. During the year-to-date period, which ended February 28, 2007, and shortly after the end of the period, CFC successfully issued a total of $1.7 billion of debt in underwritten public transactions, including $600 million of extendable senior secured bonds with a final maturity of five years; $570 million of fixed-rate senior secured bonds with a maturity of 10 years; and $550 million of senior unsecured extendable notes with a final maturity of seven years.
These lower-cost funding sources enabled CFC to refinance higher-cost debt obligations, retire foreign currency-denominated notes and reduce the company’s reliance on shorter-term commercial paper. As a result of the lower all-in funding costs, CFC is able to pass through capital market cost savings to members in the form of lower loan pricing while maintaining appropriate spreads to achieving its desired adjusted TIER targets.
The three major rating agencies—Standard & Poor’s, Moody’s and Fitch—continue to confirm CFC’s senior secured long-term ratings at A+, A1 and A+; senior unsecured long-term ratings at A, A2 and A; and unsecured short-term ratings at A1, P1 and F1; respectively. The Moody’s and Standard & Poor’s ratings each have a stable outlook, and the Fitch rating has a positive outlook.
The investor conference call—and this article—are based on CFC’s non-GAAP or adjusted measures. CFC’s 10-Q report for the period, as filed with the Securities and Exchange Commission—which is available on CFC’s Web site—contains a discussion of why CFC believes the adjusted measures are useful in analyzing CFC’s financial performance and a reconciliation to the related GAAP measures.
CFC reports its financial results on a consolidated basis—with the results of the National Cooperative Services Corporation (NCSC) and the Rural Telephone Finance Cooperative (RTFC). Lilly highlighted CFC’s financial results for the first nine months of this fiscal year, including:
- Interest income for the third quarter totaled $264.9 million versus $253.7 million for the prior year’s third quarter. Interest income totaled $789.8 million for the nine-month period ended February 28, 2007, versus $746.9 million for the same nine-month period ended February 28, 2006.
- Adjusted net interest income was $61.9 million for the third quarter ended February 28, 2007, versus adjusted net interest income of $28.4 million for the third quarter ended February 28, 2006. Adjusted net interest income for the nine-month period ended February 28, 2007, was $114 million versus adjusted net income of $87.2 million for the nine-month period ended February 28, 2006.
- Adjusted times interest earned ratio, or TIER, was 1.12 for the nine-month period ended February 28, 2007, the same adjusted TIER as the prior year’s nine-month period.
- During the nine-month period, net loans to members declined by $532 million—from $17.749 billion to $17.217 billion—including a $300 million decline in the electric utilities segment of CFC’s portfolio and a decline of $232 million in the telecommunications segment. During the third quarter, CFC sold electric distribution loans with outstanding principle balances totaling $366 million in a loan securitization transaction to the Federal Agricultural Mortgage Corporation, or Farmer Mac. CFC has no retained interest in the loans and continues to service the loans on behalf of the loan purchaser for an annual service fee. The strategic reduction of loans outstanding is the result of CFC decreasing its credit concentrations to single obligors and reducing credit outstanding to the telecommunications sector of its loan portfolio, as well as the company’s focus on maintaining and managing its leveraged position.
- CFC’s solid history of credit risk management continued into the first nine months of the 2007 fiscal year. Net cumulative principle losses from 1969, CFC’s inception, to the conclusion of the third quarter of the current fiscal year, totaled $117 million. On a consolidated basis, net charge-offs of $77,000 were incurred during the first nine months of the fiscal year. There were no additional provisions to the loan loss allowance, and CFC believes that its allowance for losses, which stood at $611 million, representing 3.43 percent of gross loans outstanding at February 28, 2007, versus 3.33 percent of gross loans outstanding at May 31, 2006, is adequate for the credit risk exposures in the loan portfolio, including troubled borrowers.
CFC’s primary focus is providing an assured source of capital to America’s rural utility organizations. CFC has renewed its revolving credit facilities subsequent to the end of the February 28, 2007, reporting period. A new 364-day facility totaling $1.125 billion and a new five-year facility totaling $1.125 billion were closed in March 2007. Combined with the five-year credit facility totaling $1.025 billion, which matures in March of 2011, CFC has a total of $3.275 billion of revolving credit lines with 21 financial institutions.
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