DBRS Confirms Credit Union Central of Ontario at R-1 (low)

DBRS has today confirmed the rating of the Short-Term Instruments of Credit Union Central of Ontario (Central) at R-1 (low) with a Stable trend.

The primary consideration in determining the rating is the low risk business profile and the strong financial risk profile of the Ontario credit unions that are members (the Members) of Central, although the Members generated lower profitability in 2007 due primarily to higher operating expenses and credit costs.

Central’s earnings, asset quality and financial risk profile were affected in 2007 by significant exposure to non-bank asset-backed commercial paper that is covered under the Montréal proposal (the affected ABCP). This issue also resulted in the postponement of the planned merger with Credit Union Central of British Columbia (CUCBC).

Central booked a $24.8 million pre-tax (17.5%) charge against its $141.9 million face value in affected ABCP. Subsequently, Central did a capital call of 20 basis points of Member assets, which more than replaced the capital lost to the writedown. The targeted date for the merger with CUCBC remains July 1, 2008, although valuation issues surrounding the affected ABCP problem have not yet been finalized. Should the business combination be completed, DBRS expects Central’s rating to be discontinued; the combined organization will assume the ratings of CUCBC as the largest portion of the new entity.

While the remaining book value of the affected ABCP remains a material proportion of Central’s equity, DBRS feels risks related to the possibility of further deterioration in pricing of the affected ABCP to Central’s financial risk profile can be addressed by Central, either alone, or through its ability to access additional capital of 20 basis points of Member assets. In the absence of an appropriate mitigating response from Central or Members, a worst-case scenario of a material deterioration in the market value of the affected ABCP could result in pressure on Central’s rating because of capital concerns.

During the most recent annual general meeting, in April 2007, Members ratified a proposal (subject to regulatory approval) giving Central’s Board of Directors the right to refuse membership share redemption requests if it would put Central’s capital at risk; this ratification strengthens Central’s financial risk profile.

On May 31, 2008, Central will hold a special general meeting of Members to vote on proposals to increase the ability of Central to make a capital call from 40 basis points of Member assets to 80 basis points (with 20 basis points already taken) and to create a special-purpose vehicle (to be owned by the Members) that will hold the affected ABCP. Should these two proposals be ratified, Central’s financial risk profile would be further strengthened.

Under DBRS’s global rating methodology for banks and bank-like financial institutions, Central has been assigned a short-term Intrinsic Assessment of R-1 (low) and a Support Assessment of SA2 (reflecting the expectation of systemic and timely external support by the government of Ontario). The SA2 does not have an impact on the final rating of R-1 (low).

Note:
All figures are in Canadian dollars unless otherwise noted.