National Rural Utilities Cooperative Finance's investment-grade paper is widening on the company's announcement that a loan it made to another telecom company is non-performing. National Rural's 5.75% of '09s widened to 88 basis points over comparable Treasuries last week, from 75bps over the previous week. And its longer paper, the 7.25% of '12s and 4.75% of '14s, widened about 7bps.
The widening comes on the heels of the company's recently filed Form 10-K, in which it said its $340 million loan to VarTec Telecom is non-performing. As a result, VarTec won't be able to make its Aug. 31 and Nov. 30 payments, explained one high-grade utilities analyst. "The public wasn't aware of problems with the VarTec loan, so this announcement created some investor concern," added the analyst, noting that rating agencies had been privy to the news prior to the announcement.
Jeffrey Wolinksy, director of utilities, energy and project finance ratings at Standard and Poor's in New York, acknowledged the rating agency was aware of financial problems VarTec was suffering but was unaware that they would affect repayment of the loan as early as this month. "The news is certainly negative for [NRUC]'s credit, but it doesn't change our outlook or our rating," he stated, although he added further deterioration could cause the rating agency to assign a negative outlook. S&P rates NRUC as single-A, with a stable outlook.
