NEW YORK - Standard & Poor's Ratings Services said Monday that it lowered its issuer credit ratings and related issue ratings on 10 of 12 Federal Home Loan Banks (FHLBs) and the senior debt issued by the FHLB System to AA-plus from AAA, and lowered the ratings on the senior debt issued by the Federal Farm Credit Banks to AA-plus from AAA. The ratings on the individual farm member banks are not affected.
In addition, S&P said it lowered the senior issue ratings on Fannie Mae and Freddie Mac to AA-plus from AAA. Its A subordinated debt rating and C rating on the preferred stock of these entities remain unchanged. Finally, it affirmed the short-term issue ratings for these entities at A-1-plus and removed them from CreditWatch Negative where they were placed July 15.
The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the U.S. government. In addition to the implicit support factored into the ratings, the U.S. Treasury has demonstrated explicit support by providing these entities with capital quarterly, as necessary.
The downgrades of 10 of the 12 FHLBs and the FHLB System's senior debt reflect a one-notch reduction in the U.S. sovereign rating. Before S&P downgraded the U.S., under its GRE criteria, 10 of the 12 FHLB banks were rated AAA, the same level as the U.S. sovereign because they have either AA-plus or AA stand-alone credit profiles and classify them as having a very high likelihood of receiving support from the government if needed. The FHLBs of Chicago and Seattle were already rated AA-plus prior to the U.S. sovereign downgrade as they have lower stand-alone credit profiles (AA-minus and A-plus, respectively) than the other 10 FHLBs.
The FHLB System is classified as being almost certain to receive government support if necessary under our GRE criteria. Thus, the FHLB System debt is rated at the same level as the U.S. sovereign rating. The implicit support that is factored into the issuer and issue credit ratings relates to the important role the FHLBs and the FHLB System play as primary liquidity providers to U.S. mortgage and housing-market participants.
