Title 7: Agriculture
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PART 1720—GUARANTEES FOR BONDS AND NOTES ISSUED FOR ELECTRIFICATION OR TELEPHONE PURPOSES
Section Contents
§ 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 requirements.
§ 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.
Source:
69 FR 63049, Oct. 29, 2004, unless otherwise noted.§ 1720.1 Purpose.
top
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).
§ 1720.2 Background.
top 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.
§ 1720.3 Definitions.
top 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 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.)
§ 1720.4 General standards.
top (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.
§ 1720.5 Eligibility criteria.
top (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.
§ 1720.6 Application process.
top (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 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.
§ 1720.7 Application evaluation.
top (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 §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.
§ 1720.8 Issuance of the guarantee.
top (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.
§ 1720.9 Guarantee Agreement.
top (a) The guaranteed lender will be required to sign a guarantee agreement with the Secretary setting forth the 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.
§ 1720.10 Fees.
top (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.
§ 1720.11 Servicing.
top 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.
§ 1720.12 Reporting requirements.
top (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.
§ 1720.13 Limitations on guarantees.
top 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.
§ 1720.14 Nature of guarantee; acceleration of guaranteed bonds.
top (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 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.
§ 1720.15 Equal opportunity requirements.
top 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.
