[Federal Register: October 29, 2004 (Volume 69, Number 209)]
[Rules and Regulations]
[Page 63045-63053]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc04-4]
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DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Part 1720
RIN 0572-AB83
Guarantees for Bonds and Notes Issued for Electrification or
Telephone Purposes
AGENCY: Rural Utilities Service, USDA.
ACTION: Final rule.
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SUMMARY: This rule establishes procedures for a guarantee program for
cooperatives and other not-for-profit lenders that make loans eligible
for assistance under the Rural Electrification Act of 1936 (the RE
Act). Criteria for eligibility of lenders and transactions are set
forth in the rule together with application procedures. Program
participants are required to pay an annual fee for the guarantee. The
fee will be credited to the Rural Development Subaccount to provide
funds for zero-interest loans and grants pursuant to section 313 of the
RE Act. The Farm Security and Rural Investment Act of 2002 (Pub. L.
107-171), amended the RE Act, by adding section 313A which establishes
this program. In addition to providing funds to enhance rural
development, this program will contribute to improving the technology
and reliability of our rural electric transmission and distribution
system.
DATES: This rule will become effective November 29, 2004.
FOR FURTHER INFORMATION CONTACT: Doris Nolte, Chief, Policy Analysis
and Loan Management Staff, Electric Program, Rural Utilities Service,
U.S. Department of Agriculture, 1400 Independence Avenue, SW., STOP
1560, Room 5155, Washington, DC 20250-1560. Telephone: (202) 720-0424.
Fax: (202) 690-0717. E-mail: Doris.Nolte@usda.gov.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This rule has been determined to be significant for purposes of
Executive Order 12866 and, therefore, has been reviewed by the Office
of Management and Budget (OMB).
Executive Order 12988
This rule has been reviewed under Executive Order 12988, Civil
Justice Reform. RUS has determined that this rule meets the applicable
standards provided in section 3 of that Executive Order. In addition,
all State and local laws and regulations that are in conflict with this
rule will be preempted. No retroactive effect will be given to the rule
and, in accordance with section 212(e) of the Department of Agriculture
Reorganization Act of 1994 (7 U.S.C. 6912(e)), administrative appeal
procedures must be exhausted before an action against the Department or
its agencies may be initiated.
Regulatory Flexibility Act Certification
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), the Administrator of RUS certifies that this
[[Page 63046]]
rule will not have significant impact on a substantial number of small
entities. No small entities meet the statutory criteria for
participation in the program that is the subject of this rulemaking.
Executive Order 13132
This regulation will not have substantial direct effects on the
States, on the relationship between the national government and the
States, or on distribution of power and responsibilities among the
various levels of government. Under Executive Order 13132, this rule
does not have sufficient federalism implications to require preparation
of a Federalism Assessment.
Information Collection and Recordkeeping Requirements
Under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.) (the
``Act''), OMB must approve all ``collection of information'' as a
requirement for ``answers to * * * identical reporting or recordkeeping
requirements imposed on ten or more persons * * *.'' (44 U.S.C.
3502(3)(A).) RUS has concluded that the reporting requirements
contained in this rule will involve less than 10 persons and do not
require approval under the provisions of the Act.
Catalog of Federal Domestic Assistance
The program described by this rule is listed in the Catalog of
Federal Domestic Assistance Programs under No. 10.850, Rural
Electrification Loans and Loan Guarantees. This catalog is available on
a subscription basis from the Superintendent of Documents, the United
States Government Printing Office, Washington, DC 20402. Telephone:
(202) 512-1800.
Executive Order 12372
This rule is excluded from the scope of Executive Order 12372,
Intergovernmental Consultation, which may require consultation with
State and local officials. See the final rule related notice entitled
``Department Programs and Activities Excluded from Executive Order
12372,'' (50 FR 47034).
Unfunded Mandates
This rule contains no Federal mandates (under the regulatory
provision of title II of the Unfunded Mandates Reform Act of 1995)
(Pub. L. 104-4, 109--Stat. 48) for State, local, and tribal governments
or the private sector. Thus, this rule is not subject to the
requirements of sections 202 and 205 of the Unfunded Mandates Reform
Act of 1995.
National Environmental Policy Act Certification
RUS has determined that this rule will not significantly affect the
quality of the human environment as defined by the National
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.) Therefore,
this action does not require an environmental impact statement or
assessment.
Background
On December 30, 2003, at 68 FR 75153, the Rural Utilities Service
(RUS) published a proposed rule, 7 CFR Part 1720, Guarantees for Bonds
and Notes issued for Electrification and Telephone Purposes. This
proposed rule establishes the agency's policies and procedures for
granting guarantees to eligible cooperatives and other not-for-profit
lenders that make loans eligible for assistance under the Rural
Electrification Act of 1936 (the RE Act). The Farm Security and Rural
Investment Act of 2002 (Pub. L. 107-171), amended the RE Act, by adding
section 313A which establishes this program.
A total of 231 letters were received commenting on the proposed
rule. Two hundred and eighteen of these letters, which were received
from electric cooperatives, electric cooperative associations, rural
development organizations, and local governments, all requested that
the rule be altered in a way that assures funding to the Rural Economic
Development Loan and Grant Fund (REDLF). Many of the comments included
the identification of successful economic development projects that
benefited from REDLG funds. The majority of the 218 letters identified
specific aspects of the proposed rule that should be altered to make
the program work. Seventy percent (70%) of the letters said the
patronage capital limitations discriminate against the cooperative
lenders and should be removed. Seventy percent (70%) also reported that
the Federal Institutions Reform, Recovery and Enforcement Act (FIRREA)
requirements, as presented in the proposed rule would make cooperative
lenders ineligible for this program. Sixty-five percent (65%) requested
that the 15-year bond term limit be changed to the useful life of the
asset. This change in term would serve to maximize funding available to
REDLG. Fifteen percent (15%) of the letters suggested that the approval
process that includes Office of Management and Budget and Treasury, is
complicated and inefficient and 10 percent or less critized using a
bankruptcy trust fund, collateral provisions, and the requirement that
bonds must be issued by Federal Financing Bank (FFB) only.
Thirteen letters were received that did not take the form of the
others and either addressed the specific questions posed in the
proposed rule or provided additional information for the development of
the final rule.
In their comment letters, the U.S. Chamber of Commerce and Edison
Electric Institute (EEI) state that Federal guarantees made to private
unregulated organizations is unprecedented and bad government policy.
Their position is that because of the legislative requirement to
establish this program, RUS must also establish appropriate safeguards
that minimize risk to American taxpayers. Four trade organizations also
supported strengthening the rule requirements and characterized the
program as providing an unfair advantage to cooperatives. This unfair
advantage would be realized, they argue, through lower rates received
in borrowing from an eligible lender that received a guarantee or by
receiving REDLG funds and establishing economic development projects
that attract new loads into a cooperative territory. The comments
received from these groups also identified specific aspects of the
proposed rule that they thought should be strengthened in order to
minimize taxpayer risk.
The National Rural Electric Cooperative Association (NRECA),
National Rural Utilities Cooperative Finance Corporation (CFC),
National Rural Telecommunications Cooperative, an electric cooperative
association, and an electric cooperative all identified aspects of the
proposed rule that they said did not comport to the Farm Security and
Rural Investment Act of 2002 (Pub. L. 107-171) (Farm Bill) legislation
establishing this program. The comments claim that the proposed rule
does not address the intent of the Congress, which was to create a new
funding mechanism for the REDLG program. These comments addressed
specific restrictions in the proposed rule and requested that they be
removed because they were not consistent with the statute and prevent
the lender with the largest volume of concurrent loans from
participating in the program.
The two general positions taken in the letters of comment received
are (1) the program does not provide enough safeguards for the American
taxpayer and the provisions in the proposed rule should be strengthened
and (2) the intent of Congress is not carried out with the proposed
rule and changes should be made to assure that the REDLG program is
funded.
[[Page 63047]]
CFC also provided an alternative approach to the restrictions
included in the proposed rule. The alternative approach is to establish
such safeguards as contemplated in the proposed rule to minimize
taxpayer risk by establishing a trigger that would impose them only if
the lender that qualifies and is granted a guarantee becomes ineligible
(i.e., no longer meets the eligibility criteria established in the
legislation). CFC proposed the trigger mechanism to be when the
lender's non-guaranteed debt falls below investment grade. At that
point, limitations on retiring patronage capital, establishing capital
adequacy tests, requiring a bankruptcy remote trust and/or collateral
requirements would go into effect.
Changes Made to the Final Rule
A review of the limited legislative history that exists for this
provision of the 2002 Farm Bill indicates that the intent of Congress
was to establish an additional private funding mechanism for the Rural
Economic Development Loan and Grant program. This flow of funds is the
cost to qualified lenders for receiving a federal guarantee of bonds
and notes according to the statutory criteria established in section
6101 of the Farm Bill.
RUS also agrees that appropriate safeguards must be implemented to
assure risk is minimized for the American taxpayers as this program
establishes a new relationship between eligible lenders and the Federal
government. Furthermore, Congress has established this program by
amending the RE Act, and fully expects RUS to continue its prudent
guarantee and lending practices. For these reasons, RUS will provide
additional requirements of the lender beyond the provisions established
in section 6101 of the Farm Bill. Based upon the comments received and
additional research into the requirements proposed, the final rule has
been modified to maintain the safeguards envisioned in the proposed
rule while establishing a program according to the provisions of
section 6101 of the Farm Bill.
The statute provides some criteria for establishing lender and
guarantee eligibility. The statute, however, does not address
requirements to ensure the security of a government guarantee, and
there is no indication that RUS should not take prudent steps to
address declining credit quality. For these reasons, RUS will establish
requirements of the guaranteed lender to ensure the security of the
government's guarantee throughout the term of the guarantee.
Patronage Capital limitations. The proposed rule requires that the
guaranteed lender not issue cash patronage refunds in excess of five
percent of the total patronage refund eligible. Additionally, stock
issued as part of the patronage refund shall not be redeemable in cash
during the term of the guarantee, and the lender is not allowed to
issue dividends on any class of stock during the term of the guarantee.
Comments were received in favor of this restriction and some
recommended lowering the limitation to two percent of the total
patronage refund eligible. Comments were also received reporting that
this limitation was not contemplated by the statute, and there is no
rationale provided for this restriction. Furthermore, it is pointed out
that capping patronage distributions reduces the cash flow of any RUS
borrower that is also a borrower of the guaranteed lender and this
reduction in cash flow may result in an increase in RUS loan security
risk. One hundred and forty eight comments were received reporting that
cooperatives depend upon the patronage capital distributions to keep
electric rates low and to further invest in rural communities. One
comment received expressed a belief that this restriction is
unnecessary as capital markets already require financial targets for
earnings retention.
RUS will maintain a patronage capital limitation when a guaranteed
lender's credit rating on its senior secured debt, without regard to
the guarantee, falls below ``A-''. Under such a scenario, the
guaranteed lender will be required to limit the patronage capital
refunds in excess of five percent of the patronage capital. RUS
believes this requirement represents a sound approach to ensuring
capital adequacy and in minimizing the risk of default.
FIRREA. The proposed rule requires each applicant to submit a
review and certification of the lender's capital adequacy utilizing the
capital adequacy standards of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA). The proposed rule also
requires that during the term of the guarantee, a FIRREA review be
conducted annually. Comments were received requesting that the full
requirements of FIRREA be imposed. Other comments claim the FIRREA
requirements as presented in the proposed rule make cooperative lenders
ineligible based upon their financial structure. Cooperative lenders
have forms of equity not recognized by the formulas utilized under
FIRREA. One hundred and fifty comment letters were received expressing
a concern that the FIRREA standards do not apply to the cooperative
structure and that such a requirement would make cooperatives
ineligible for the guarantee program.
RUS agrees that the FIRREA requirement would limit participation in
the guarantee program. Upon further review of the FIRREA requirements,
and public comment, it has become clear that definitions of
liabilities, capital, and risk-based assets under FIRREA do not match
the financial structures and business model used by cooperative lenders
and cannot directly apply. The majority of the savings institutions
subject to the requirements of FIRREA do not have publicly traded debt
outstanding, and have had no formal bond ratings assigned. Accordingly,
the focus of the credit review for such entities is upon the regulatory
accounting standards under which those lenders obtain deposit
insurance.
The statutory requirements of this guarantee program rely upon
credit evaluations by the rating agencies. Their ratings reflect the
ability of the lender to meet its long-term payment obligations based
upon the lender's financial positions, managerial skills and other
factors. RUS has considered alternative methods of establishing capital
adequacy of a guaranteed lender under this program and has evaluated
the benefits of establishing financial indicator ratio requirements to
accomplish that goal. Based upon the comments received and further
review, RUS will rely upon the credit rating agencies and the ongoing
review of a lender's financial position as required in other sections
of the rule to evaluate adequacy and monitor the financial condition of
the program participants.
In addition, RUS will independently monitor publicly available
information on a program participant as it becomes available. RUS will
use this information to monitor and evaluate the adequacy of the
financial condition of program participants.
Bankruptcy Remote Trust. The proposed rule requires the lender,
during the term of the guarantee, to establish a bankruptcy remote
trust fund capitalized at five percent of the guaranteed amount
outstanding. Comments received in favor of additional restrictions
favor this requirement and a few suggested increasing the capitalized
percentage. Comments were also received with claims that a lender whose
securities are investment grade rated is already viewed by the capital
markets as adequately capitalized, with sufficient reserves and capital
market liquidity. Twenty-two comment letters were received reporting
that this requirement
[[Page 63048]]
was not contemplated in the Farm Bill and should not be implemented.
CFC asserts that in capital markets, bankruptcy-remote trusts are used
in non-recourse financing and that all CFC bonds are not non-recourse--
any investor in CFC has the right to make a claim against CFC as a
corporation.
Although a bankruptcy remote trust fund is a sound risk management
tool in many situations, RUS believes that other requirements of this
rule are sufficient to ensure the security of the government guarantee,
and therefore this particular requirement has been removed.
Collateral Requirements. The proposed rule requires the applicant
to provide a description of the specific and identifiable loans
comprising the collateral or other pledge securing the guaranteed
bonds. While comments were received in support for this idea claiming
that this would aid in minimizing taxpayer risk, other comments were
received requesting that no such requirement be imposed as it is
outside of the statutory criteria. CFC asserts that a collateral
requirement is duplicative of the bankruptcy-remote trust requirement.
RUS will maintain this requirement when the guaranteed lender's
credit rating on its senior secured debt, without regard to the
guarantee, falls below ``A-''. In such cases, collateral shall be in
the form of specific and identifiable unpledged securities equal to
100% of the value of the guarantee. This requirement is viewed as an
important safeguard for protecting against a call on the Federal
guarantee when the lender's creditworthiness has declined.
15-year bond term. The proposed rule requires a final maturity of
guaranteed bonds not to exceed 15 years. Some comment letters received
claim this restriction will aid in minimizing taxpayer risk. Other
comments urged RUS to continue its practice of matching terms to the
useful life of an asset. One hundred and thirty-nine comment letters
received urged the restriction to be lifted recognizing the normal RUS
lending practice of 30-35 year terms and also stating that the longer
terms would extend the funding to REDLG and maximize economic
development benefits to rural America. CFC claims that the limitation
on maturity of bonds is inconsistent with the intent of the statute.
The limitation exposes the government to additional risks (bond term/
borrowers loan maturity mismatch can create both interest rate and
liquidity risk).
Based upon comment letters received and the desire to establish a
bond or note guarantee term consistent with RUS lending practices, RUS
will establish a term of 20 years which is the estimated average
outstanding balance of concurrent loans currently eligible under this
program.
FFB only funding source. The proposed rule requires that the
guaranteed bonds must be issued to the FFB on terms and conditions
consistent with the FFB lending policy. Nineteen comment letters were
received expressing concern with this limitation. CFC argues that this
is inconsistent with a provision in the statute providing that the
guarantees ``shall be fully assignable and transferable'' indicating
that they could be issued in the capital markets. The rule also does
not require FFB to purchase the offering and it does not discuss the
rates, terms, or options for the transaction between the lender and
FFB. CFC requests that flexibility be provided to issue the bonds to
FFB or in the capital market to maximize the benefit.
RUS understands the CFC argument that the ``best deal'' should be
obtained in issuing a bond or not for a guarantee. Therefore, the final
rule requires that the guaranteed bond or note be issued to FFB on
terms and conditions consistent with comparable government-guaranteed
bonds and satisfactory to the Secretary.
Approval requirements to include Office of Management and Budget
(OMB) and U.S. Department of Treasury. The proposed rule requires an
independent assessment of the application by OMB and FFB prior to a
decision on the guarantee being made by the Secretary. Thirty-five (35)
comments were received claiming that this is neither needed nor
efficient. Other comments suggest that there is no statutory
requirement for this process.
RUS is eliminating the requirement that FFB and OMB review the
application. Instead, RUS is required to request that FFB review the
credit rating of the bond or note to be issued. The expertise that FFB
possesses will help to ensure the security of the government guarantee.
Regulatory Procedures Issues
Comments received from the U.S. Chamber of Commerce and one
individual suggest that the United States Department of Agriculture did
not follow the appropriate procedures in promulgated the proposed rule.
RUS has considered these comments and believes they are without merit.
For example, RUS has complied with the Regulatory Flexibility Act (5
U.S.C. 601 et seq.) by determining that because the procedures
contained in the proposed rule apply to only two entities, neither of
whom are small, the rule will have no significant impact on small
businesses or other small entities. The use of the word ``determine''
in context in which it was used in the published notice that was signed
by the head of the agency is synonymous with the word ``certify''
within means ``to confirm formally as true.'' Since RUS certifies that
there is no substantial impact on a significant number of small
entities, the balance of the comments received on the Regulatory
Flexibility Act are inapposite and in any event have more to do with
the effects of programs which section 313A funds and which were not the
subject of the proposed rulemaking.
Commenters have not correctly applied National Environmental
Protection Act (NEPA) implementation regulations of RUS. As authority
for their proposition that the proposed rule was subject to a full
environmental review involving the public, commenters cited 7 CFR
1794.3. That provision provides merely that the provisions of 7 CFR
part 1794 apply to, inter alia, the issuance of new or revised rules.
However, Title 7 part 1794 does not require environmental reviews or
public participation in such reviews in all cases. The provisions of 7
CFR part 1794 identify and establish categories of actions for
environmental review purposes. These categories range from actions that
are categorically exempt to those normally requiring the development of
an environmental impact statement. RUS regulations do not require the
agency to publish a Finding of No Significant Impact (FONSI) each time
RUS determines that an action will not have a significant environmental
impact. RUS regulations require the publication of a FONSI only when
its determination has been made on the basis of an Environmental
Assessment (EA). Generally speaking, publications of regulations do not
require an EA. It is only the issuance or modification of RUS
regulations concerning environmental matters that are listed in 7 CFR
part 1794 as normally requiring an EA (7 CFR 1794.23(a)). Accordingly,
the discussion of NEPA in the proposed rule complied with NEPA and RUS
regulations implementing NEPA.
RUS was not, as some commenters wrote, required to prepare a
Statement of Energy Effects to comply with Executive Order (E.O. 13211,
``Actions Concerning Regulations That Significantly Affect Energy
Supply, Distribution, or Use''. However, E.O. 13211 does not require
the preparation of such statements in connection with every proposed
rulemaking that is a
[[Page 63049]]
significant regulatory action under E.O. 12866 as the commenters seem
to imply. while it is correct that in order for a proposed rule to be a
``significant energy action'' under E.O. 13211, the proposal must be a
``significant regulatory action'' under Executive Order 12866, at least
one of two other requirements must be met before the obligation to
prepare a statement of energy effects exists. The propose rule must
either be ``likely to have significant adverse effect on the supply,
distribution, or use of energy'' or it must be so ``designated by the
Administrator of the Office of Information and Regulatory Affairs as a
significant energy action.'' E.O. 13211 sections 2(a) and 4(b). Neither
of these two factors are present here. Since E.O. 13211 does not apply
to the proposed rule, there is no need to address comments about what
such an analysis should provide.
Some commenters wrote that the proposed rule did not meet the
requirement under Executive Order 12866, ``Regulatory Planning and
Review'', requiring all ``significant regulatory actions'' by Federal
agencies to undergo cost-benefit assessment by the agency and
centralized review by the Office of Information and Regulatory Affairs
(OIRA), an organizational subunit of the OMB. RUS did conduct the
appropriate regulatory analysis required for issuing the proposed rule
to establish this Guarantee of Bonds and Notes program. RUS has
provided the appropriate studies and justifications to OIRA for
centralized review and the necessary OMB clearances were obtained
before publishing the proposed rule and this final rule in the Federal
Register.
RUS received a few comments to the effect that RUS did not provide
adequate opportunity for public participation during the development of
the proposed rule and suggesting that the comment period for the
proposed rule be extended. RUS believes that there has been ample
opportunity for public participation and that any further delays in
implementing the program cannot be justified. Section 313A amending the
rural Electrification Act of 1936 (7 U.S.C. 940c-1) was signed into law
on May 13, 2002. Pub. L. 107-171, Title VI, sec. 6101(a). There are
directives in sec. 6101(b) of Pub. L. 107-171 requiring the
promulgation of regulations within 180 days of enactment and to
implement the program within 240 days. Accordingly, enactment of
Section 313A gave notice that rules covering this subject matter would
soon be forthcoming. Section 313A itself established many of the
program requirements contained in the proposed rule and clearly
signaled the principal areas that would be addressed by the program.
RUS provided 60 days for comments on the proposed regulations. Perhaps
the best evidence demonstrating the adequacy of the public's
opportunity for participation in the proposed rulemaking is the fact
that RUS received 231 written comments in response to the notice.
List of Subjects in 7 CFR Part 1720
Electric power, Electric utilities, Loan program--energy, reporting
and recordkeeping requirements, Rural areas.
0
For reasons set out in the preamble, RUS amends chapter XVII of title 7
of the Code of Federal Regulations by adding a new part 1720 to read as
follows:
PART 1720--GUARANTEES FOR BONDS AND NOTES ISSUED FOR
ELECTRIFICATION OR TELEPHONE PURPOSES
Sec.
1720.1 Purpose.
1720.2 Background.
1720.3 Definitions.
1720.4 General standards.
1720.5 Eligibility criteria.
1720.6 Application process.
1720.7 Application evaluation.
1720.8 Issuance of the guarantee.
1720.9 Guarantee Agreement.
1720.10 Fees.
1720.11 Servicing.
1720.12 Reporting requirement.
1720.13 Limitations on guarantees.
1720.14 Nature of guarantee; acceleration of guaranteed bonds.
1720.15 Equal opportunity requirements.
Authority: 7 U.S.C. 901 et seq.; 7 U.S.C. 940C.
Sec. 1720.1 Purpose.
This part prescribes regulations implementing a guarantee program
for bonds and notes issued for electrification on telephone purposes
authorized by section 313A of the Rural Electrification Act of 1936 (7
U.S.C. 940c-1).
Sec. 1720.2 Background.
The Rural Electrification Act of 1936 (the ``RE Act'') (7 U.S.C.
901 et seq.) authorizes the Secretary to guarantee and make loans to
persons, corporations, states, territories, municipalities, and
cooperative, non-profit, or limited-dividend associations for the
purpose of furnishing or improving electric and telephone service in
rural areas. Responsibility for administering electrification and
telecommunications loan and guarantee programs along with other
functions the Secretary deemed appropriate have been assigned to RUS
under the Department of Agriculture Reorganization Act of 1994 (7
U.S.C. 6941 et seq.). The Administrator of RUS has been delegated
responsibility for administering the programs and activities of RUS,
see 7 CFR 1700.25. Section 6101 of the Farm Security and Rural
Investment Act of 2002 (Pub. L. 107-171) (FSRIA) amended the RE Act to
include a new program under section 313A entitled Guarantees for Bonds
and Notes Issued for Electrification or Telephone Purposes. This
measure became law on May 13, 2002, and directs the Secretary of
Agriculture to promulgate regulations that carry out the Program.
Sec. 1720.3 Definitions.
For the purpose of this part:
Administrator means the Administrator of RUS.
Applicant means a bank or other lending institution organized as a
private, not-for-profit cooperative association, or otherwise on a non-
profit basis, that is applying for RUS to guarantee a bond or note
under this part.
Bond Documents means the trust indenture, bond resolution,
guarantee, guarantee agreement and all other instruments and
documentation pertaining to the issuance of the guaranteed bonds.
Borrower means any organization that has an outstanding loan made
or guaranteed by RUS for rural electrification or rural telephone under
the RE Act, or that is seeking such financing.
Concurrent Loan means a loan that a guaranteed lender extends to a
borrower for up to 30 percent of the cost of an eligible
electrification or telephone purpose under the RE Act, concurrently
with an insured loan made by the Secretary pursuant to section 307 of
the RE Act.
Federal Financing Bank (FFB) means a government corporation and
instrumentality of the United States of America under the general
supervision of the Secretary of the Treasury.
Guarantee means the written agreement between the Secretary and a
guaranteed bondholder, pursuant to which the Secretary guarantees full
repayment of the principal, interest, and call premium, if any, on the
guaranteed lender's guaranteed bond.
Guarantee Agreement means the written agreement between the
Secretary and the guaranteed lender which sets forth the terms and
conditions of the guarantee.
Guaranteed Bond means any bond, note, debenture, or other debt
obligation issued by a guaranteed lender on a fixed
[[Page 63050]]
or variable rate basis, and approved by the Secretary for a guarantee
under this part.
Guaranteed Bondholder means any investor in a guaranteed bond.
Guaranteed Lender means an applicant that has been approved for a
guarantee under this part.
Loan means any credit instrument that the guaranteed lender extends
to a borrower for any electrification or telephone purpose eligible
under the RE Act, including loans as set forth in section 4 of the RE
Act for electricity transmission lines and distribution systems
(excluding generating facilities) and as set forth in section 201 of
the RE Act for telephone lines, facilities and systems.
Loan documents means the loan agreement and all other instruments
and documentation between the guaranteed lender and the borrower
evidencing the making, disbursing, securing, collecting, or otherwise
administering of a loan.
Program means the guarantee program for bonds and notes issued for
electrification or telephone purposes authorized by section 313A of the
RE Act as amended.
Rating Agency means a bond rating agency identified by the
Securities and Exchange Commission as a nationally recognized
statistical rating organization.
RE Act means the Rural Electrification Act of 1936 (7 U.S.C. 901 et
seq.) as amended.
RUS means the Rural Utilities Service, a Rural Development agency
of the U.S. Department of Agriculture.
Secretary means the Secretary of Agriculture acting through the
Administrator of RUS.
Subsidy Amount means the amount of budget authority sufficient to
cover the estimated long-term cost to the Federal government of a
guarantee, calculated on a net present value basis, excluding
administrative costs and any incidental effects on government receipts
or outlays, in accordance with the provisions of the Federal Credit
Reform Act of 1990 (2 U.S.C. 661 et. seq.)
Sec. 1720.4 General standards.
(a) In accordance with section 313A of the RE Act, a guarantee will
be issued by the Secretary only if the Secretary determines, in
accordance with the requirements set forth in this part, that:
(1) The proceeds of the guaranteed bonds will be used by the
guaranteed lender to make loans to borrowers for electrification or
telephone purposes eligible for assistance under this chapter, or to
refinance bonds or notes previously issued by the guaranteed lender for
such purposes;
(2) At the time the guarantee is executed, the total principal
amount of guaranteed bonds outstanding would not exceed the principal
amount of outstanding concurrent loans previously made by the
guaranteed lender;
(3) The proceeds of the guaranteed bonds will not be used directly
or indirectly to fund projects for the generation of electricity; and
(4) The guaranteed lender will not use any amounts obtained from
the reduction in funding costs provided by the program to reduce the
interest rates borrowers are paying on new or outstanding loans, other
than new concurrent loans as provided in 7 CFR part 1710, of this
chapter.
(b) During the term of the guarantee, the guaranteed lender shall:
(1) Limit cash patronage refunds, for guaranteed lenders having a
credit rating below ``A-'' on its senior secured debt without regard to
the guarantee. For such guaranteed lenders, cash patronage refunds are
limited to five percent of the total patronage refund eligible. The
limit on patronage refunds must be maintained until the credit rating
is restored to ``A-'' or above. For those guaranteed lenders subject to
patronage limitations, equity securities issued as part of the
patronage refund shall not be redeemable in cash during the term of any
part of the guarantee, and the guaranteed lender shall not issue any
dividends on any class of equity securities during the term of the
guarantee.
(2) Maintain sufficient collateral equal to the principal amount
outstanding, for guaranteed lenders having a credit rating below ``A-''
on its senior secured debt without regard to the guarantee. Collateral
shall be in the form of specific and identifiable unpledged securities
equal to the value of the guaranteed amount. In the case of a
guaranteed lender's default, the U.S. government claim shall not be
subordinated to the claims of other creditors, and the indenture must
provide that in the event of default, the government has first rights
on the asset. Upon application and throughout the term of the
guarantee, guaranteed lenders not subject to collateral pledging
requirements shall identify, with the concurrence of the Secretary,
specific assets to be held as collateral should the credit rating of
its senior secured debt without regard to the guarantee fall below ``A-
''. The Secretary has discretion to require collateral at any time
should circumstances warrant.
(c) The final maturity of the guaranteed bonds shall not exceed 20
years.
(d) The guaranteed bonds shall be issued to the Federal Financing
Bank on terms and conditions consistent with comparable government-
guaranteed bonds and satisfactory to the Secretary.
(e) The Secretary shall guarantee payment son guaranteed bonds in
such forms and on such terms and conditions and subject to such
covenants, representations, warranties and requirements (including
requirements for audits) as determined appropriate for satisfying the
requirements of this part. The Secretary shall require the guaranteed
lender to enter into a guarantee agreement to evidence its acceptance
of the foregoing. Any guarantee issued under this part shall be made in
a separate and distinct offering.
Sec. 1720.5 Eligibility criteria.
(a) To be eligible to participate in the program, a guaranteed
lender must be:
(1) A bank or other lending institution organized as a private,
not-for-profit cooperative association, or otherwise on a non-profit
basis; and
(2) Able to demonstrate to the Secretary that it possesses the
appropriate expertise, experience, and qualifications to make loans for
electrification or telephone purposes.
(b) To be eligible to receive a guarantee, a guaranteed lender's
bond must meet the following criteria:
(1) The guaranteed leader must furnish the Secretary with a
certified list of the principal balances of concurrent loans then
outstanding evidencing that such aggregate balance is at least equal to
the sum of the proposed principal amount of guaranteed bonds to be
issued, and any previously issued guaranteed bonds outstanding; and
(2) The guaranteed bonds to be issued by the guaranteed lender must
receive an underlying investment grade rating from a Rating Agency,
without regard to the guarantee;
(c) A lending institution's status as an eligible applicant does
not assure that the Secretary will issue the guarantee sought in the
amount or under the terms requested, or otherwise preclude the
Secretary from declining to issue a guarantee.
Sec. 1720.6 Application process.
(a) Applications shall contain the following:
(1) Background and contact information on the applicant;
(2) A term sheet summarizing the proposed terms and conditions of,
and the security pledged to assure the applicant's performance under,
the guarantee agreement;
(3) A statement by the applicant as to how it proposes to use the
proceeds of
[[Page 63051]]
the guaranteed bonds, and the financial benefit it anticipates deriving
from participating in the program;
(4) A pro-forma cash flow projection or business plan for the next
five years, demonstrating that there is reasonable assurance that the
applicant will be able to repay the guaranteed bonds in accordance with
their terms;
(5) Consolidated financial statements of the guaranteed lender for
the previous three years that have been audited by an independent
certified public accountant, including any associated notes, as well as
any interim financial statements and associated notes for the current
fiscal year;
(6) Evidence of having been assigned an investment grade rating on
the debt obligations for which it is seeking the guarantee, without
regard to the guarantee;
(7) Evidence of a credit rating, from a Rating Agency, on its
senior secured debt without regard to the government guarantee and
satisfactory to the Secretary.
(8) Such other application documents and submissions deemed
necessary by the Secretary for the evaluation of applicants.
(b) The application process occurs as follows:
(1) The applicant submits an application to the Secretary;
(2) The application is screened by RUS pursuant to 7 CFR 1720.7(a)
of this part, to ascertain its threshold eligibility for the program;
(3) RUS evaluates the application pursuant to the selection
criteria set forth in 7 CFR 1720.7(b) of this part;
(4) If RUS provisionally approves the application, the applicant
and RUS negotiate terms and conditions of the bond documents, and
(5) The applicant offers its guaranteed bonds, and the Secretary
upon approval of the pricing, redemption provisions and other terms of
the offering, executes the guarantee.
(c) If requested by the applicant at the time it files its
application, the General Counsel of the Department of Agriculture shall
provide the Secretary with an opinion regarding the validity and
authority of a guarantee issued to the lender under section 313A of the
RE Act.
Sec. 1720.7 Application evaluation.
(a) Eligibility screening. Each application will be reviewed by the
Secretary to determine whether it is eligible under 7 CFR 1720.5, the
information required under 7 CFR 1720.6 is complete and the proposed
guaranteed bond complies with applicable statutes and regulations. The
Secretary can at any time reject an application that fails to meet
these requirements.
(b) Evaluation. Pursuant to paragraph (a) of this section,
applications will be subject to a substantive review, on a competitive
basis, by the Secretary based upon the following evaluation factors,
listed in order of importance:
(1) The extent to which the proposed provisions indicate the
applicant will be able to repay the guaranteed bonds;
(2) The adequacy of the proposed provisions to protect the Federal
government, based upon items including, but not limited to the nature
of the pledged security, the priority of the lien position, if any,
pledged by the applicant, and the provision for an orderly retirement
of principal such as an amortizing bond structure or an internal
sinking fund;
(3) The applicant's demonstrated performance of financially sound
business practices;
(4) The extent to which providing the guarantee to the applicant
will help reduce the cost and/or increase the supply of credit to rural
America, to generate other economic benefits, including the amount of
fee income available to be deposited into the Rural Economic
Development Subaccount, maintained under section 313(b)(2)(A) of the RE
Act (7 U.S.C. 940c-1(b)(2)(B)), after payment of the subsidy amount.
(c) Independent Assessment. Before a guarantee decision is made by
the Secretary, the Secretary shall request that the Federal Financing
Bank review the adequacy of the determination by the Rating Agency,
required under Sec. 1720.5(b)(2) as to whether the bond or note to be
issued would be below investment grade without the guarantee.
(d) Decisions by the Secretary. The Secretary shall approve or deny
applications in a timely manner as such applications are received. The
Secretary may limit the number of guarantees made to a maximum of five
per year, to ensure a sufficient examination is conducted of applicant
requests. RUS shall notify the applicant in writing of the Secretary's
approval or denial of an application. Approvals for guarantees shall be
conditioned upon compliance with 7 CFR 1720.4 and 1720.6.
Sec. 1720.8 Issuance of the guarantee.
(a) The following requirements must be met by the applicant prior
to the endorsement of a guarantee by the Secretary.
(1) A guarantee agreement suitable in form and substance to the
Secretary must be delivered.
(2) Bond documents must be executed by the applicant setting forth
the legal provisions relating to the guaranteed bonds, including but
not limited to payment dates, interest rates, redemption features,
pledged security, additional borrowing terms including an explicit
agreement to make payments even if loans made using the proceeds of
such bond or note is not repaid to the lender, other financial
covenants, and events of default and remedies;
(3) Prior to the issuance of the guarantee, the applicant must
certify to the Secretary that the proceeds from the guaranteed bonds
will be applied to fund eligible new loans under the RE Act, to
refinance concurrent loans, or to refinance existing debt instruments
of the guaranteed lender used to fund eligible loans;
(4) The applicant provides a certified list of concurrent loans and
their outstanding balances as of the date the guarantee is to be
issued;
(5) Counsel to the applicant must furnish an opinion satisfactory
to the Secretary as to the applicant being legally authorized to issue
the guaranteed bonds and enter into the bond documents;
(6) No material adverse change occurs between the date of the
application and date of execution of the guarantee;
(7) The applicant shall provide evidence of an investment grade
rating from a Rating Agency for the proposed guaranteed bond without
regard to the guarantee;
(8) The applicant shall provide evidence of a credit rating on its
senior secured debt without regard to the guarantee and satisfactory to
the Secretary; and
(9) Certification by the Chairman of the Board and the Chief
Executive Officer of the applicant (or other senior management
acceptable to the Secretary), acknowledging the applicant's commitment
to submit to the Secretary, an annual credit assessment of the
applicant by a Rating Agency, an annual review and certification of the
security of the government guarantee that is audited by an independent
certified public accounting firm or federal banking regulator, annual
consolidated financial statements audited by an independent certified
public accountant each year during which the guarantee bonds are
outstanding, and other such information requested by the Secretary.
(b) The Secretary shall not issue a guarantee if the applicant is
unwilling or unable to satisfy all requirements.
Sec. 1720.9 Guarantee Agreement.
(a) The guaranteed lender will be required to sign a guarantee
agreement with the Secretary setting forth the
[[Page 63052]]
terms and conditions upon which the Secretary guarantees the payment of
the guaranteed bonds.
(b) The guaranteed bonds shall refer to the guarantee agreement as
controlling the terms of the guarantee.
(c) The guarantee agreement shall address the following matters:
(1) Definitions and principles of construction;
(2) The form of guarantee;
(3) Coverage of the guarantee;
(4) Timely demand for payment on the guarantee;
(5) Any prohibited amendments of bond documents or limitations on
transfer of the guarantee;
(6) Limitation on acceleration of guaranteed bonds;
(7) Calculation and manner of paying the guarantee fee;
(8) Consequences of revocation of payment on the guaranteed bonds;
(9) Representations and warranties of the guaranteed lender;
(10) Representations and warranties for the benefit of the holder
of the guaranteed bonds;
(11) Claim procedures;
(12) What constitutes a failure by the guaranteed lender to pay;
(13) Demand on RUS;
(14) Assignment to RUS;
(15) Conditions of guarantee which may include requiring the
guaranteed lender to adopt measures to ensure adequate capital levels
are retained to absorb losses relative to risk in the guaranteed
lender's portfolio and requirements on the guaranteed lender to hold
additional capital against the risk of default;
(16) Payment by RUS;
(17) RUS payment does not discharge guaranteed lender;
(18) Undertakings for the benefit of the holders of guaranteed
bonds, including: notices, registration, prohibited amendments,
prohibited transfers, indemnification, multiple bond issues;
(19) Governing law;
(20) Notices;
(21) Benefit of agreement;
(22) Entirety of agreement;
(23) Amendments and waivers;
(24) Counterparts;
(25) Severability, and
(26) Such other matters as the Secretary believes to be necessary
or appropriate.
Sec. 1720.10 Fees.
(a) Guarantee fee. An annual fee equal to 30 basis points (0.3
percent) of the amount of the unpaid principal of the guarantee bond
will be deposited into the Rural Economic Development Subaccount
maintained under section 313(b)(2)(A) of the RE Act.
(b) Subject to paragraph (c) of this section, up to one-third of
the 30 basis point guarantee fee may be used to fund the subsidy amount
of providing guarantees, to the extent not otherwise funded through
appropriation actions by Congress.
(c) Notwithstanding subsections (c) and (e)(2) of section 313A of
the RE Act, the Secretary shall, with the consent of the lender and if
otherwise authorized by law, adjust the schedule for payment of the
annual fee, not to exceed an average of 30 basis points per year for
the term of the loan, to ensure that sufficient funds are available to
pay the subsidy costs for note guarantees.
Sec. 1720.11 Servicing.
The Secretary, or other agent of the Secretary on his or her
behalf, shall have the right to service the guaranteed bond, and
periodically inspect the books and accounts of the guaranteed lender to
ascertain compliance with the provisions of the RE Act and the bond
documents.
Sec. 1720.12 Reporting requirements.
(a) As long as any guaranteed bonds remain outstanding, the
guaranteed lender shall provide the Secretary with the following items
each year within 90 days of the guaranteed lender's fiscal year end:
(1) Consolidated financial statements and accompanying footnotes,
audited by independent certified public accountants;
(2) A review and certification of the security of the government
guarantee, audited by reputable, independent certified public
accountants or a federal banking regulator, who in the judgment of the
Secretary, has the requisite skills, knowledge, reputation, and
experience to properly conduct such a review;
(3) Pro forma projection of the guaranteed lender's balance sheet,
income statement, and statement of cash flows over the ensuing five
years;
(4) Credit assessment issued by a Rating Agency;
(5) Credit rating, by a Rating Agency, on its senior secured debt
without regard to the guarantee and satisfactory to the Secretary;
(6) Other such information requested by the Secretary.
(b) The bond documents shall specify such bond monitoring and
financial reporting requirements as deemed appropriate by the
Secretary.
Sec. 1720.13 Limitations on guarantees.
In a given year the maximum amount of guaranteed bonds that the
Secretary may approve will be subject to budget authority, together
with receipts authority from projected fee collections from guaranteed
lenders, the principle amount of outstanding concurrent loans made by
the guaranteed lender, and Congressionally-mandated ceilings on the
total amount of credit. The Secretary may also impose other limitations
as appropriate to administer this guarantee program.
Sec. 1720.14 Nature of guarantee; acceleration of guaranteed bonds.
(a) Any guarantee executed by the Secretary under this part shall
be an obligation supported by the full faith and credit of the United
States and incontestable except for fraud or misrepresentation of which
the guaranteed bondholder had actual knowledge at the time it purchased
the guaranteed bonds.
(b) Amounts due under the guarantee shall be paid within 30 days of
demand by a bondholder, certifying the amount of payment then due and
payable.
(c) The guarantee shall be assignable and transferable to any
purchaser of guaranteed bonds as provided in the bond documents.
(d) The following actions shall constitute events of default under
the terms of the guarantee agreements:
(1) The guaranteed lender failed to make a payment of principal or
interest when due on the guaranteed bonds;
(2) The guaranteed bonds were issued in violation of the terms and
conditions of the bond documents;
(3) The guarantee fee required by 7 CFR 1720.10 of this part, has
not been paid;
(4) The guaranteed lender made a misrepresentation to the Secretary
in any material respect in connection with the application, the
guaranteed bonds, or the reporting requirements listed in 7 CFR
1720.12; or
(5) The guaranteed lender failed to comply with any material
covenant or provision contained in the bond documents.
(e) In the event the guaranteed lender fails to cure such defaults
within the notice terms and the timeframe set forth in the bond
documents, the Secretary may demand that the guaranteed lender redeem
the guaranteed bonds. Such redemption amount will be in an amount equal
to the outstanding principal balance, accrued interest to the date of
redemption, and prepayment premium, if any. To the extent the Secretary
makes any payments under the guarantee, the Secretary shall be deemed
the guaranteed bondholder.
(f) To the extent the Secretary makes any payments under the
guarantee, the interest rate the government will charge to the
guaranteed lender for the period
[[Page 63053]]
of default shall accrue at an annual rate of the greater of 1.5 times
the 91-day Treasury-Bill rate or 200 basis points (2.00%) above the
rate on the guaranteed bonds.
(g) Upon guaranteed lender's event of default, under the bond
documents, the Secretary shall be entitled to take such other action as
is provided for by law or under the bond documents.
Sec. 1720.15 Equal opportunity requirements.
Executive Order 12898, ``Environmental Justice.'' To comply with
Executive Order 12898, RUS will conduct a Civil Rights Analysis for
each guarantee prior to approval. Rural Development Form 2006-28,
``Civil Rights Impact Analysis'', will be used to document compliance
in regards to environmental justice. The Civil Rights Impact Analysis
will be conducted prior to application approval or a conditional
commitment of guarantee.
Dated: October 26, 2004.
Gilbert Gonzalez,
Acting Under Secretary, Rural Development.
[FR Doc. 04-24353 Filed 10-28-04; 8:45 am]
BILLING CODE 3410-15-P