Pub. 10 2015-2016 Issue 2

www.nebankers.org 18 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2015 Bert Ely CoBank Does It Again! Lends to Investor-Owned Water Company C OBANK NOT ONLY LENDS TO investor-owned utilities, but also brags about it. Accord- ing to a recent blog post on AGgregator, run by the Farm Credit Council (the Farm Credit System trade association), CoBank is a substantial lender to Connecticut Water Service Inc. The company characterizes itself as “the largest U.S. based publicly traded water utility company in New England.” Its ticker symbol is CTWS. The company had $671 million in assets at the end of 2014, a net worth of $210 million, and after-tax profits in 2014 of $21.3 million. S&P has given CTWS an investment-grade credit rating of A, so CTWS is hardly struggling financially and certainly does not warrant any taxpayer-subsidized funding. According to CTWS’ most recent 10- K, CoBank has provided the company with a $15 million line of credit, along- side a $20 million line of credit from a commercial bank. At the end of 2014, CTWS and its subsidiaries also owed CoBank $75.63 million in long-term debt, for a total credit-risk exposure of almost $91 million. Some of CTWS’ long-term debt appears to remain from the $36.1 million CTWS borrowed from CoBank in 2012 to help finance the ac- quisition of a water company in Maine. CTWS has to be one of CoBank's larger individual risk exposures in its water/ wastewater lending business, where it had lent a total of $1.26 billion at the end of 2014. Possibly CoBank has par- ticipated portions of its CTWS credit exposure to other Farm Credit System (FCS) institutions. It is highly unlikely, though, that any FCS participants in CoBank’s CTWS loans understand that credit risk. FCS Squeezing Banks Out of Loan Participations? The FCS loves to talk about how it seeks to work with commercial banks in providing credit to rural America. For example, the Farm Credit Council (FCC) states that “the [FCS] works with commercial banks across America on a daily basis to meet the needs for vital capital.” Working with commercial banks usually means banks taking par- ticipations in FCS-originated loans, and vice versa. CoBank, for example, has participated in loans to large, investor- owned telecommunication companies, such as Verizon, that were originated by a commercial bank. CoBank also routinely sells to banks participations in loans it has originated, all of which is authorized under the Farm Credit Act. The matter of FCS institutions and commercial banks buying and selling loan participations to each other may begin to clash with a key difference be- tween the FCS and commercial banks— unlike banks, most FCS institutions, but not all, pay “patronage dividends” to their member/borrowers. Although called dividends, patronage dividends effectively are interest-rate rebates as the amount of the annual patron- age dividend generally relates to the amount borrowed the previous year. In effect, the FCS passes through to its borrowers a portion of the tax savings and funding-cost advantages the FCS enjoys by virtue of being a government- sponsored enterprise (GSE). These re- bates are not insignificant. For 2014, the FCS as a whole recorded cash patronage dividends totaling $1.20 billion, equal to 14.5 percent of the total amount of loan interest income the FCS reported for 2014. The dividend/rebate each bor- rower received likely varied from this percentage, but this percentage gives you an idea of the current magnitude of patronage dividends. In addition, various FCS institutions granted $387 million of non-cash capital stock, participation certificates, and surplus allocations to their member/borrowers.