Pub. 8 2013-2014 Issue 4

www.nebankers.org 26 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2013 Bert Ely I n what is perhaps one of the most egregious violations of the spirit of the Farm Credit Act I have ever seen, if not an actual violation, CoBank is lending $725 mil- lion to Verizon. This financing will help Verizon acquire from Vodafone, the British-headquartered telecom giant, the 45 percent of Verizon Wireless it does not already own. In a deal an- nounced last month, Verizon is paying Vodafone $130 billion, with $49 billion of that amount funded through the sale of bonds and $12 billion from a bank loan. The loan was split into $6 billion five-year and three-year tranches and then syndicated to 48 banks across the globe; CoBank’s $725 million, 6.04 percent of this loan, is the single largest piece of the loan. The pricing on this bank loan is very sweet: LIBOR plus 137.5 basis points on the three-year tranche and Libor plus 150 basis points on the five-year tranche. CoBank, of course, can borrow short-term below LIBOR because it is a government-sponsored enterprise (GSE). Assuming the Verizon loan will be priced off three-month LIBOR, at today’s interest rates CoBank will earn a spread of approximately 156 basis points on the three-year loan to Veri- zon, a BBB (investment grade) credit, and a spread of a 167 basis points on the five-year loan. Those spreads total to $11.7 million annually. When interest rates eventually rise, the dif- ferential between LIBOR and the rate at which CoBank can borrow probably will widen, making this loan evenmore profitable. CoBank also earned a $2.5 million commitment fee on this loan. CoBank’s loan to Verizon is outra- geous for several reasons. First, this loan will not fund construction of any rural wireless infrastructure—it merely funds a corporate buyout. Second, Verizon is not a rural telephone co- operative, one type of entity CoBank can lend to—it is a stockholder-owned corporation primarily serving urban markets. Third, while CoBank can lend to “other entities,” Verizon is not such an entity. Fourth, to the extent that Verizon Wireless serves rural areas, it competes against CoBank’s coop- eratively owned borrowers. Fifth, the Verizon loan is one of the Farm Credit System’s (FCS’) largest credit risks as it is just below the FCS’ self-imposed loan limit of $750 million. This loan equals 0.38 percent of total FCS loans outstanding on June 30, 2013, and 2.1 percent of CoBank’s loans to non-FCS borrowers. The bottom line: CoBank’s corpo- rate-buyout loan to Verizon is an in- credibly blatant attempt by CoBank to arbitrage its GSE status, which entitles it to cheap funding and tax exemp- tions. The FarmCredit Administration (FCA), CoBank’s regulator, should immediately direct CoBank to sell its Verizon loan, which it should be able to do without any loss. If the FCA does not, then it has opened the proverbial barn door to other FCS banks and as- sociations lending to corporate entities of all types. That certainly will be the case if CoBank sells participations in its Verizon loan to other FCS entities. Letter to House Ag Committee Asks for FCS Hearing On Oct. 7, American Bankers Asso- ciation (ABA) President andCEOFrank Keating sent a letter to Reps. Frank Lucas and Colin Peterson, the chair- man and rankingmember of the House Agriculture Committee, requesting that the committee “hold an oversight hear- ing to examine the financial practices, regulation, and growth of the FCS.” In making this request, Keating observed that “the committee has not held a hearing on the FCS in many years.” Noting that bankers “are alarmed at the growth and questionable practices of the federally subsidized [FCS],” Ke- ating suggested that the committee or one of its subcommittees should exam- ine the following specific issues, many of which I have addressed in prior is- sues of the Farm Credit Watch (FCW): indirect lending through entities such as AgDirect; retained mineral rights arising from real estate foreclosures; never-ending pilot programs such as “Investments in Rural America” or Rural America Bonds; questionable practices involving the sale of Federal Crop Insurance; and shadow banking CoBank Lends Verizon $725 Million