Pub. 4 2015 Issue 6

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 20 BERT ELY’S FARM CREDIT WATCH ® SHEDDING LIGHT ON THE FARM CREDIT SYSTEM, AMERICA’S LEAST KNOWN GSE ©2014 Bert Ely COBANK DOES IT AGAIN – LENDS TO INVESTOR-OWNED WATER COMPANY C OBANK NOT ONLY LENDS TO INVESTOR- OWNED utilities, but brags about it. According to a recent blog post on AGgregator, run by the Farm Credit Council (the FCS trade association), CoBank is a substantial lender to the Connecticut Water Service, Inc. The company characterizes itself as “the largest U.S. based publicly-traded water utility company in New England.” Its ticker symbol is CTWS. The company had $671 million in assets at the end of 2014, a net worth of $210 million, and after-tax profits in 2014 of $21.3 million. S&P has given CTWS an investment-grade credit rating of A, so CTWS is hardly struggling financially and certainly does not warrant any taxpayer-subsidized funding. According to CTWS’s most recent 10-K, CoBank has provided the company with a $15 million line-of-credit, alongside a $20 million line-of-credit from a commercial bank. At the end of 2014, CTWS and its subsidiaries also owed CoBank $75.63 million in long-term debt, for a total credit-risk exposure of almost $91 million. Some of CTWS’s long-term debt appears to remain from the $36.1 million CTWS borrowed from CoBank in 2012 to help finance the acquisition of a water company in Maine. CTWS has to be one of CoBank's larger individual risk exposures in its water/wastewater lending business, where it had lent a total of $1.26 billion at the end of 2014. Possibly CoBank has participated portions of its CTWS credit exposure to other FCS institutions. It is highly unlikely, though, that any FCS participants in CoBank’s CTWS loans understand that credit risk. FCS squeezing commercial banks out of loan participations? The FCS loves to talk about how it seeks to work with commercial banks in providing credit to rural America. For example, the Farm Credit Council states that “the [FCS] works with commercial banks across America on a daily basis to meet the needs for vital capital.” Working with commercial banks usually means banks taking participations in FCS-originated loans, and vice versa. CoBank, for example, has participated in loans to large, investor-owned telecommunication companies, such as Verizon, that were originated by a commercial bank. CoBank also routinely sells to banks participations in loans it has originated, all of which is authorized under the Farm Credit Act. The matter of FCS institutions and commercial banks buying and selling loan participations to each other may begin to clash with a key difference between the FCS and commercial banks – unlike banks, most FCS institutions, but not all, pay “patronage dividends” to their member/borrowers. Although called dividends, patronage dividends effectively are interest- rate rebates as the amount of the annual patronage dividend generally relates to the amount borrowed the previous year.