Farm Credit Watch: CoBank does big financing deals with AT&T, U.S. Cellular

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In just two days this month, CoBank committed to providing $425 million of
taxpayer-subsidized funding to two of the largest stockholder-owned
telecommunications companies – $225 million on January 22 to U.S. Cellular
and $200 million on January 21 to AT&T. These loans follow on the heels of
CoBank’s $350 million loan last June to Frontier Communications and
CoBank’s $725 million loan to Verizon last February. These four credit
extensions to stockholder-owned corporations total $1.5 billion. According to
an SEC 8-K filing on the U.S. Cellular deal, it appears that CoBank sold
participations of at least $5 million each to the Farm Credit Bank of Texas and
twelve FCS direct-lending associations. An interesting question is whether
these associations have the authority, under the Farm Credit Act, to lend
money to U.S. Cellular.

These loans lie far outside CoBank’s authority to lend to cooperatively owned
telephone companies, yet it appears the FCS’s regulator, the Farm Credit
Administration (FCA), has done nothing to prohibit CoBank’s lending to
corporate America. In fact, it appears that the FCA has green-lighted
CoBank’s expansion into financing stockholder-owned utilities. Perhaps that
light flashed green for CoBank when FCA board member and former
chairman Leland Strom vigorously defended the Verizon loan at the secret
symposium the FCA held last January where FCS insiders and selected
guests discussed the future of the FCS. Strom stated that “greater lending
capacity provides opportunity for [FCS] institutions like CoBank to participate
in large corporate banking transactions such as the recent Verizon purchase
of Vodaphone’s stake in Verizon Wireless. This loan was made under the
Farm Credit Act’s similar lending authority as it relates to rural telecom
lending.” [emphasis supplied]

Leaving aside the fact that AT&T, U.S. Cellular, Verizon, and Frontier
Communications can hardly be characterized as rural telecom companies
even though they may serve rural areas, it is hard to imagine that Congress,
when it granted the FCS the authority to lend to rural cooperatives in 1933,
envisioned that the FCS, and CoBank specifically, would use that authority “to
participate in large corporate banking transactions.” It also is hard to believe
that when Congress granted what today is CoBank the authority to lend to
“similar entities,” that is, businesses “functionally similar” to the telephone
cooperatives eligible to borrow from CoBank, it intended for CoBank to be
providing taxpayer-subsidized credit to large firms readily able to tap global
capital markets. These four loans certainly warrant congressional scrutiny as
they are excellent examples of, one, the FCS, and CoBank in particular,
abusing its lending authority and, two, the FCA turning a blind eye towards these deals.

Indiana college obtains $27 million loan from the FCS

An even more egregious FCS lending abuse occurred in May 2013, when St.
Joseph’s College in Rensselaer, Indiana, borrowed $27 million from Farm
Credit Mid-America (FCMA); FCMA, headquartered in Louisville, is the
second-largest FCS direct-lending association. According to a St. Joseph’s
news release, the college refinanced “its long term debt obligations through
partnerships with DeMotte State Bank [of DeMotte, Indiana] and
[FCMA].” The loan “will be locked in at a fixed interest rate for a 20 year
term.” Reportedly, the bank, with assets of $364 million, merely services the
loan on behalf of FCMA.

Clearly the FCS is not authorized to lend to educational institutions, which
raises the question: How could FCMA make this loan to the
college? According to news reports, the late Juanita Kious Waugh, upon her
death in 2010, bequeathed 7,634 acres of farmland, valued at approximately
$40 million, to St. Joseph’s, which already owned another 800 acres of
farmland. The farmland is leased and actively farmed; in addition, windmills
on the land generate substantial revenue. Presumably this valuable farmland
collateralizes the FCMA loan. But there are two problems with this

First, is St. Joseph’s an eligible FCS borrower? More specifically, to use the
language of the Farm Credit Act, is St. Joseph’s a bona fide farmer, rancher,
or producer or harvester of aquatic products given that the college leases its
farmland to persons who do the actual farming? FCA regulations define a
bona fide farmer as “a person owning agricultural land or engaged in the
production of agricultural products, including aquatic products.” [emphasis
supplied] However, the first portion of the regulation, “a person owning,” goes
beyond a plain reading of the phrase “bona fide” as that phrase is used in the
Farm Credit Act. The dictionary meaning of “bona fide” is genuine or
real. Synonyms include authentic, true, actual, legitimate, and valid. All of
these meanings apply to a person actually engaged in farming – they
certainly do not apply to a person, or a college, who merely owns the
farmland and leases that land to actual farmers. Hence, the FCA regulation
governing who is eligible to borrow from the FCS has a far broader scope
than the statute on which that regulation is based.

Second, even if St. Joseph’s is an eligible FCS borrower, can FCMA establish
a valid first lien on the farmland Ms. Waugh donated to the college given that
the Farm Credit Act requires that FCS real estate loans must be secured by a
first lien on the real estate securing the loan. Ms. Waugh, reportedly a savvy
businesswoman, “worried that the church might one day overturn any
agreement she had with the college and sell her land if it needed
cash.” Therefore, to prevent the sale of the land, “she stipulated in her will
and written agreements with the college that neither the college nor the
church could sell the farmland, going so far as to stipulate in the transfer deed
that the land could be used only for farming and wind-energy production and
never sold.” This restriction raises this crucial question: Can FCMA place a
valid first lien on the farmland given that the college is barred from selling the
land under any circumstance? If not, then is FCMA’s loan to the college a real
estate loan or an unsecured loan, which clearly FCMA cannot make to an educational institution.

In November, I asked the FCA if St. Joseph’s could be considered to be a
“bone fide” farmer as Congress meant that term to be interpreted. I also sent
the FCA information about the FCMA loan, including copies of news articles
reporting that the Waugh farmland cannot be sold. Michael Stokke, the FCA’s
Director of Congressional and Public Affairs, responding to my email, stated
that my inquiry “does not involve a loan for which you are obligated,” which is
how the FCA often blows off complaints about improper FCS
lending. Stokke’s letter then stated that “we assure you that, under our
examination authority, we have reviewed [FCMA’s] relationship with the
College and determined that, in its business dealings with the College,
[FCMA] has complied with our regulations.” Hence, it appears that the FCA is
saying that an FCS institution can make an unsecured loan to an educational
institution that is not actually engaged in farming. Presumably FCA Chairman
Jill Long Thompson, who used to represent a congressional district near
Rensselaer, agrees with Stokke’s response. I also asked a representative of
FCMA about the appropriateness of this loan. To date, FCMA has not
responded, which is not surprising. This is another FCS loan that merits
congressional inquiry.