Corporate System Resolution Program Reaches an Important Milestone

Over the last few years, NCUA has made significant progress towards a successful resolution of the corporate credit union crisis.

The outstanding balance of NCUA Guaranteed Notes has declined to $9.2 billion at the end of May from a peak of more than $25 billion. The outstanding balance of the NGNs has declined from principal and interest payments on the underlying securities, though it's important to note that NCUA has not made any parity or maturity payments as guarantor yet. There also have been no Stabilization Fund assessments since 2013 and legal settlements have surpassed $3.1 billion.

The outstanding Treasury borrowing has been paid down to $1 billion—its lowest point since 2010 and down from a highpoint of $5.1 billion in 2012. The 2013 Stabilization Fund assessment of $694 million, NGN guarantee fees of $255 million, $183 million transferred from the Share Insurance Fund when it exceeded its 1.30 percent normal operating level and legal settlements with the firms that sold the faulty mortgage-backed securities to the failed corporate credit unions have provided most of the proceeds used to repay the U.S. Treasury.

This year, the NGN program reached another important milestone. Specifically, some of the NGNs have begun maturing or paying off from cash flows on the underlying securities collateralizing them. The first NGN matured in December 2015, and another matured in March. This resulted in nearly 130 securities from the five failed corporate credit unions, with a total market value of $725 million, freed from serving as collateral for the NGNs. Also, another two NGNs are expected to mature by the end of 2016, freeing up another 133 securities with a total market value of $1.1 billion. Two other NGN deals are projected to mature in the fourth quarter of 2017 and then no additional NGN maturities are projected until 2020.

As a result, by the end of 2016—after accounting for projected principal payments and defaults in the interim— NCUA will actively manage about 225 securities with a total market value of $1.7 billion. That's a market value, on average, of about 70 percent of the outstanding principal balance of these securities. For each of these 225 securities, NCUA will make ongoing decisions about selling them or holding them until some future decision point.

Until 2020, the Stabilization Fund and asset management estates are not projected to have any additional funding needs beyond what is expected to be produced by incoming proceeds from other aspects of the Corporate System Resolution Program, such as the NGN guarantee fee. Because of this, there is no immediate need to sell securities to meet obligations.

Also, there are ongoing legal recovery efforts for some of these securities and their sale could undermine those efforts. With a few exceptions, there is no conclusive market or individual-investment specific factors indicating these securities should be sold at this time.

However, a small number of these securities—about 20 with a combined market value of $450 million—have market values very near, at or above their outstanding principal balance. These 20 securities have no pending legal recovery efforts underway or planned, and they are not projected to mature in the short term.

Because of these factors, it is prudent to sell these 20 securities at this time because it harvests their value now and sheds the downside risk associated with any reduction in market prices that could occur in the future if they were held. These sales also provide NCUA the opportunity to exercise the process in anticipation of larger sales in the future.

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The funds collected from these sales, combined with other ongoing proceeds of the Corporate System Resolution Program, contribute to funding the remaining obligations of the Stabilization Fund and asset management estates. The primary remaining obligations are repayment of the $1 billion outstanding with the U.S. Treasury and Image: Shutterstock projected guarantee and maturity payments on the remaining NGNs of more $3 billion to close the NGN Program and the Stabilization Fund. Because of these obligations, there are no funds available to provide federally insured credit unions with a refund of assessments or recoveries on depleted capital at this time.

Currently, the total net-realizable value estimate of all the securities collateralizing the NGNs—determined by NCUA, with the assistance of BlackRock—exceed by approximately $1.5 billion the market value of these securities. The net realizable and market values naturally converge as the securities approach maturity. Generally, this would suggest a strategy prioritizing holding the securities to maturity. However, one needs to keep in mind the current weightedaverage life of the securities is 5.5 years, with some securities having remaining maturities of more than 20 years.

Thus, a primary risk in the intervening period leading up to maturity is that defaults on the securities exceed projections— something that could result from a significant economic downturn. In addition, other future developments in the market could cause investors to reduce what they would pay for the securities, necessitating holding the securities until maturity or accepting less value than what could have been obtained when market values were higher. Consequently, under a strategy that prioritizes holding securities over a longer period, the amount ultimately realized could fall materially below the amount that could be realized under a strategy that prioritizes selling securities sooner rather than later.

As the liquidating agent, NCUA is responsible for ultimately disposing of the failed corporate credit unions' securities collateralizing the NGNs. NCUA will monitor market conditions and evaluate individual securities going forward to determine the optimal disposition strategy for each remaining security.

In addition, NCUA will continue considering various options for large-scale disposition strategies at the end of the Corporate System Resolution Program. NCUA plans to engage stakeholders before implementing any large-scale plans that materially affect the timing and amount of potential refunds to federally insured credit unions.

For more information on the NGNs and the Temporary Corporate Credit Union Stabilization Fund, visit