This could be one of those (myriad) important milestones for bloggers in the financial space…
We’ve recently been enjoying and linking heavily to Zero Hedge a blog edited by pseudonymous trader Tyler Durden. He does an amazing job picking apart uncovered stories, including many related to the CDS market, which suddenly the whole world has a fixation on, but little understanding of.
Recently he called attention to the CDS spreads on the little-known National Rural Utilities Cooperative Finance Corporation, a tax exempt firm that provides financial services to utility firms around the country. Basically, they seemed eerily cheap for a financial in this environment. The post did an exhaustive job questioning the company’s financial health — to exhaustive to snip or summarize — but here’s the nut:
So we dig deeper… Low profile NRUC (no public equity) is a non-profit, tax-exempt financial institution exclusively serving rural electric, service and telecommunication utilities, which was organised in 1969 by rural electric cooperatives (RECs) as an “economically alternative” source to federally subsidized funds from the Rural Utilities Services (RUS) of the U.S. Department of Agriculture. A cursory Google search for the company reveals that despite its lack of media exposure it did briefly make waves on July 16 2007 when Barron’s picked up on a credit downgrade not by the SEC-recognised rating agencies (responsible for such recent events as, hmm, the Second Great Depression) but by small and often ridiculed Egan Jones (noted for having the best independent credit research department with a hit-miss ratio of 96% over the past 7 years, and being an early predictor of the Enron and WorldCom disasters) which cut the company to a whopping B+: smack in the middle of junk bond territory. The reason why a credit downgrade could be critical and potentially deadly to NRUC is that much like AIG and GE, its entire business model is based on its access to cheap capital, which it subsequently lends out to its member firms at slightly higher rates, thereby generating profits on the margin. A downgrade would doom the company as it would only be able to raise capital at much higher, and therefore loss generating, rates. Additionally the company also has rating-based collateral thresholds, which if crossed could trigger over $9 billion notional in interest-rate exchange agreements (more on this later). The Barron’s article so incensed the company that the very next day CEO Sheldon Petersen issued a statement and a letter refuting Egan Jones’ allegations, essentially claiming that E-J is a dwarf when compared to such intellectual giants as S&P and Moody’s, whose “leading ratings analysts will tell you, CFC’s credit fundamentals are strong and our financial underpinnings are rock solid.”
“Despite the fact that CFC’s secured debt has received an A or higher rating from all three SEC-recognised rating agencies since 1972 (and currently has an A+/A1/A+ rating from Standard and Poor’s, Moody’s and Fitch, respectively), the article gives undue credence to a deeply flawed report authored by Egan-Jones, an organisation that is not designated by the SEC as a nationally recognised statistical rating organisation.”
The story subsequently died down and any potential problems at NRUC were buried deep under the carpet… Until late Friday when Egan Jones came back with a bang, downgrading NRUC yet another notch to B. Could they be on to something?
The post goes on to answer that question, and the answer seems to be yes.
Not long after Durden published the report, CFC’s spreads started to widen dramatically. And now the firm has been forced to put out a release trashing the post:
Blogger Strikes at CFC, Electric Co-ops
On March 8, an anonymous blogger who goes by the alias Tyler Durden (the same name as Brad Pitt’s psychopathic character in the movie “Fight Club”) wrote an unflattering opinion of CFC securities in his blog “Zero Hedge.” The blog, which circulated across the Internet, complained that CFC’s credit default swaps (CDS) were trading too tightly to U.S. Treasuries, a sign of strength.
Durden’s blog appears to be based in large part on an Egan-Jones report issued on March 6. Egan-Jones is a subscription-only ratings agency that two years ago released a very negative report about CFC, calling CFC securities the equivalent of “junk bonds”—a judgment the markets have soundly rejected.
“The blogger repeats the same old allegations made a few years ago, which are every bit as flawed today as they were then,” said Mike O’Brien, CFC vice president of Corporate Communications. “We do not believe the blogger’s report reflects an understanding of our financial condition or our results of operations, cashflow, ability to service our debt obligations or the strength of our loan portfolio.”
In the time since Egan-Jones issued its first report on CFC, and despite the meltdown in the capital markets, CFC continues to be rated investment grade by Standard & Poor’s, Moody’s, and Fitch Ratings, O’Brien said. “CFC’s superior credit rating is a function of our conservative lending, funding and risk management practices, in addition to a strong liquidity position, an appropriate loan loss reserve and management’s expertise.” Read the whole thing >
The press release goes onto cite comments made to the Zero Hedge post that defend CFC’s business model! Pretty sure we’ve never seen that before.
We’ll hold off on the debate overall, and again just note what we think is a really meaningful story about the balance of power in the media.. The Zero Hedge piece makes for a great read, as well as a good blueprint for one might seriously go about analysing this stuff.