Pub. 11 2016-2017 Issue 1

May/June 2016 23 Extraordinary Service for Extraordinary Members. quoting from the Post article, the author, Karen Macdonald, completely mischaracterized the article, focusing on Bob Engel’s quote that “it is unfortunate that trade associations for the banking industry often ignore the extremely positive and long-standing working relationship that [FCS] has with commercial banks when they are lobbying Congress or com- municating with their members.” It is, of course, the rare community banker who speaks positively about the FCS. Interestingly, the blog post did not indicate Macdonald’s af- filiation. Quite possibly, she is the same KarenMacdonaldwho lives in the Denver area, where CoBank is headquartered, and who, according to her LinkedIn entry, was once a “marketing communications manager” at CoBank. Does CoBank have any allies within the FCS? CoBank Angers Investors by Redeeming Subordinated Debt CoBank can’t seem to help itself in angering its various constituencies, including the investment community, which buys FCS debt. CoBank’s latest misstep stems from revisions in FCS capital requirements the Farm Credit Administra- tion (FCA), the FCS regulator, recently announced. The new capital regulations are intended to more closely align the 2017 FCS capital requirements with the capital require- ments for commercial banks. Under the new capital rules, CoBank’s subordinated debt will no longer qualify as capital for leverage capital purposes. CoBank asserted in a March 11 news release that because the FCA’s announcement of its new capital requirements made CoBank’s subordinated debt redeemable, CoBank would therefore redeem $405 million of 7.875 percent subordinated notes. In today’s low-rate environment, those notes had been trading at 112.5 cents on the dollar. Investors in those notes understandably howled, and complained to the FCA. According to one news report, investors are concerned that, if CoBank is successful in redeeming its subordinated notes, AgriBank FCB, another of the four FCS banks, will seek to retire $498 million of subordinated notes due in 2019. Those notes, which yield 9.125 percent, trade at a 20 percent premium over book value. Farm Credit Bank of Texas and AgStar Financial Services, the fourth-largest FCS association, have smaller amounts of high-yielding subordinated debt outstanding they will probably try to redeem, too. A news article about these forthcoming redemptions reported that “some creditors who stand to lose money have threatened never to buy another CoBank or [FCS] bond again.” That is unlikely, though, given the high creditworthiness of senior FCS debt due to its implicit federal backing—see below. It will be interesting to see if any bondholders sue to block the CoBank redemption. Fitch Affirms FCS & FCS Banks’ High Credit Ratings Fitch Ratings, one of the three major credit rating agen- cies, recently reaffirmed the FCS’ “long-term Issuer Default Rating (IDR) and short-term IDR at AAA/F1+ respectively.  Bert Ely — continued on page 24