Government-backing leads Fitch to rate NCUA notes triple-A
Fitch Ratings assigned triple-A ratings to a pre-sale report Tuesday's concerning the roughly $4.38 billion issue of residential mortgage-backed securities by the National Credit Union Administration. Barclays Capital is lead manager for the negotiated sale. Fitch analysts said the notes warrant the gilt-edged rating due to full faith and credit pledge of the U.S. government. Last week, the NCUA, which is the federal regulator for credit unions, received a letter from four federal offices confirming the government's backing for the notes. The securities have an initial guarantee for timely payment of interest and principle from the NCUA. The sale furthers the NCUA plan to divest itself of about $50 billion of troubled assets it acquired upon taking a handful of credit unions into conservatorship. The RMBS will be split in two pools. The Senior I-A notes will include all variable-rate assets include in the securities, and the Senior II-A notes will comprise the fixed-rate portfolio of the debt, according to the Fitch note. In March 2009, the NCUA took over U.S. Central Federal Credit Union, which had $34 billion in assets at the time, most of which were deteriorating RMBS. According to Fitch, nearly 77% of the underlying RMBS assets in this week's issue carry ratings below investment grade, including many rated triple-C or lower. Some 93.3% of the RMBS assets were originated between 2005 and 2007, with the remaining 6.7% written in 2002 to 2004, analysts said. With this sale, the NCUA becomes a re-securitized real estate mortgage investment conduit issuer, or Re-REMIC. "These structures are expected to be used going forward as the government agencies will tap into getting liquidity using their [triple-A] rating as opposed to using current budgets," said Ron D'Vari, chief executive of NewOak Capital. "This is a good way to not monetize losses by selling in to the market that still requires a premium for taking risky assets. By guaranteeing this paper, maximum capital is raised and the losses will be hidden and delayed for future budget years!" The confirmation of the government backing enables the NCUA to offer the RMBS without first registering them with the Securities and Exchange Commission. The NCUA said its funding approach also allows it to avoid full-market losses on the legacy assets. In March, the FDIC completed the first sale of this type of government-backed RMBS with a $1.8 billion issue of bonds secured by loans from seven failed banks. Upon seizing three corporate credit unions a few weeks ago, NCUA chairman Debbie Matz said the regulator now holds about 98% of the troubled assets in the space. The NCUA is expected to bring roughly 10 more RMBS sales to market in the coming months as it moves through the troubled assets. Still, any rejuvenation to private-sector RMBS issuance seems far off. "The RMBS and Re-REMICs would still need help from government backing unless it is pristine, newly originated, low- to medium-current LTV, prime borrower, high quality/retail origination channel, and significant subordination and first loss protection," D'Vari said. Write to Jason Philyaw.