Pub. 2 2013 Issue 9

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 18 BERT ELY’S FARM CREDIT WATCH ® SHEDDING LIGHT ON THE FARM CREDIT SYSTEM, AMERICA’S LEAST KNOWN GSE 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 million to Verizon. This financing will help Verizon acquire from Vodafone, the British- headquartered telecom giant, the 45% of Verizon Wireless it does not already own. In a deal announced 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% 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 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 Verizon, 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 differential between LIBOR and the rate at which CoBank can borrow probably will widen, making this loan even more profitable. CoBank also earned a $2.5 million commitment fee on this loan. CoBank’s loan to Verizon is outrageous 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 cooperative, 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 cooperatively owned borrowers. Fifth, the Verizon loan is one of the FCS’s largest credit risks as it is just below the FCS’s 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. CoBank Lends Verizon $725 Million