FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 1999
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number 1-7102
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA 52-0891669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Woodland Park, 2201 Cooperative Way, Herndon, VA 20171-3025
(Address of principal executive offices)
Registrant's telephone number, including the area code (703)709-6700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Page 1 of 31
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
November 30, 1999 May 31, 1999
CASH AND CASH EQUIVALENTS $ 85,827 $ 74,403
DEBT SERVICE INVESTMENTS 22,968 22,969
LOANS TO MEMBERS, NET 14,965,906 13,491,199
RECEIVABLES 158,405 161,523
FIXED ASSETS, NET 43,006 38,683
DEBT SERVICE RESERVE FUNDS 98,870 98,870
OTHER ASSETS 38,946 37,605
TOTAL ASSETS $15,413,928 $13,925,252
The accompanying notes are an integral part of
these combined financial statements.
2
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
L I A B I L I T I E S A N D M E M B E R S' E Q U I T Y
(Unaudited)
November 30, 1999 May 31, 1999
NOTES PAYABLE, due within one year $ 6,389,697 $ 4,976,706
ACCOUNTS PAYABLE 17,508 16,707
ACCRUED INTEREST PAYABLE 123,943 95,741
LONG-TERM DEBT 6,883,576 6,891,122
OTHER LIABILITIES 16,116 10,207
QUARTERLY INCOME CAPITAL SECURITIES 400,000 400,000
MEMBERS' SUBORDINATED CERTIFICATES:
Membership subordinated certificates 641,985 641,937
Loan & guarantee subordinated
certificates 666,565 597,879
Total members' subordinated certificates 1,308,550 1,239,816
MEMBERS' EQUITY 274,538 294,953
Total members' subordinated
certificates & members' equity 1,583,088 1,534,769
TOTAL LIABILITIES AND MEMBERS' EQUITY $15,413,928 $13,925,252
The accompanying notes are an integral part of
these combined financial statements.
3
<PAGE>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS
(Dollar Amounts in Thousands)
For the Quarters and Six Months Ended November 30, 1999 and 1998
Quarters Ended Six Months Ended
November 30, November 30,
1999 1998 1999 1998
OPERATING INCOME-Interest on
loans to members $242,850 $192,238 $469,255 $372,381
Less: Cost of funds 205,161 158,398 396,001 310,367
Gross operating margin 37,689 33,840 73,254 62,014
EXPENSES:
General, administrative and
loan processing 5,790 6,053 11,161 11,593
Provision for loan losses 8,590 9,894 17,355 15,780
Total expenses 14,380 15,947 28,516 27,373
Operating margin 23,309 17,893 44,738 34,641
NON-OPERATING INCOME 303 337 841 1,082
NET MARGINS $ 23,612 $ 18,230 $ 45,579 $ 35,723
The accompanying notes are an integral part of these
combined financial statements.
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<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Quarters Ended November 30, 1999 and 1998
Patronage Capital
Allocated
Unal- General
Education located Reserve
Total Memberships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Quarter ended November 30, 1999
Balance at August 31, 1999 $250,979 $ 1,531 $ 500 $24,256 $ 503 $224,189
Retirement of patronage capital - - - - - -
Net margins 23,612 - - 23,612 - -
Other (53) (1) (62) - - 10
Balance at November 30, 1999 $274,538 $ 1,530 $ 438 $47,868 $ 503 $224,199
Quarter ended November 30, 1998
Balance at August 31, 1998 $239,956 $ 1,504 $ 635 $19,782 $ 500 $217,535
Retirement of patronage capital (237) - - - - (237)
Net margins 18,230 - - 18,230 - -
Other (195) 12 (207) - - -
Balance at November 30, 1998 $257,754 $ 1,516 $ 428 $38,012 $ 500 $217,298
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Six Months Ended November 30, 1999 and 1998
Patronage Capital
Allocated
Unal- General
Education located Reserve
Total Memberships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Six Months ended November 30, 1999
Balance at May 31, 1999 $294,953 $1,535 $ 543 $ 2,289 $ 503 $290,083
Retirement of patronage capital (66,445) - - - - (66,445)
Net margins 45,579 - - 45,579 - -
Other 451 (5) (105) - - 561
Balance at November 30, 1999 $274,538 $1,530 $ 438 $47,868 $ 503 $224,199
Six Months ended November 30, 1998
Balance at May 31, 1998 $279,278 $1,491 $ 676 $ 2,289 $ 500 $274,322
Retirement of patronage capital (57,601) - - - - (57,601)
Net margins 35,723 - - 35,723 - -
Other 354 25 (248) - - 577
Balance at November 30, 1998 $257,754 $1,516 $ 428 $38,012 $ 500 $217,298
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
6
<PAGE>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Six Months Ended November 30, 1999 and 1998
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margins $ 45,579 $ 35,723
Add (deduct):
Provision for loan losses 17,355 15,780
Depreciation 694 745
Amortization of deferred income (1,210) (3,106)
Amortization of issuance costs and
deferred charges 2,743 1,609
Receivables 2,638 (7,476)
Accounts payable 802 (3,695)
Accrued interest payable 28,202 19,581
Other (6,849) (8,659)
Net cash flows provided by operating activities 89,954 50,502
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans (3,693,092) (4,841,299)
Principal collected on loans 2,201,030 3,378,625
Investments in fixed assets (5,017) (3,578)
Net cash flows used in investing activities (1,497,079) (1,466,252)
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable, net 220,925 (336,919)
Debt service investments, net 1 -
Proceeds from issuance of long-term debt 2,209,909 1,771,900
Payments for retirement of long-term debt (1,025,765) (171,118)
Proceeds from issuance of quarterly
income capital securities - 200,000
Proceeds from issuance of members'
subordinated certificates 70,692 39,725
Payments for retirement of members'
subordinated certificates (1,479) (6,702)
Payments for retirement of patronage capital (55,734) (50,985)
Net cash flows provided by
financing activities 1,418,549 1,445,901
NET INCREASE IN CASH & CASH EQUIVALENTS 11,424 30,151
BEGINNING CASH AND CASH EQUIVALENTS 74,403 65,274
ENDING CASH AND CASH EQUIVALENTS $ 85,827 $ 95,425
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during six months for interest $ 370,552 $ 292,612
The accompanying notes are an integral part of these
combined financial statements.
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<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements
(1) General Information and Accounting Policies
(a) General Information
National Rural Utilities Cooperative Finance Corporation ("CFC") is a
private, not-for-profit cooperative association which provides supplemental
financing and related financial service programs for the benefit of its
members. Membership is limited to certain cooperatives, not-for-profit
corporations, public bodies and related service organizations, as defined in
CFC's Bylaws. CFC is exempt from the payment of Federal income taxes under
Section 501(c)(4) of the Internal Revenue Code.
CFC's 1,050 members as of November 30, 1999, included 904 rural electric
utility system members, virtually all of which are consumer-owned
cooperatives, 75 service members and 71 associate members. The utility
members systems included 834 distribution systems and 70 generation and
transmission systems operating in 48 states and four U.S. territories.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private
cooperative association in the state of South Dakota in September 1987. RTFC
is a controlled affiliate of CFC and was created for the purpose of
providing, securing and arranging financing for its rural telecommunications
members and affiliates. RTFC's results of operations and financial condition
have been combined with those of CFC in the accompanying financial
statements. As of November 30, 1999, RTFC had 533 members other than CFC.
RTFC is a taxable entity under Subchapter T of the Internal Revenue Code and
accordingly takes tax deductions for allocations of net margins to its
patrons.
Guaranty Funding Cooperative ("GFC") was incorporated as a private
cooperative association in the state of South Dakota in December 1991. GFC
is a controlled affiliate of CFC and was created for the purpose of providing
and servicing loans to its members to fund the refinancing of loans
guaranteed by the Rural Utilities Service ("RUS"). GFC's results of
operations and statements of financial condition have been combined with
those of CFC and RTFC in the accompanying financial statements. Loans held
by GFC were transferred to GFC by CFC and are guaranteed by the RUS. GFC
had two members other than CFC at November 30, 1999. GFC is a taxable entity
under Subchapter T of the Internal Revenue Code and accordingly takes
deductions for allocations of net margins to its patrons.
In the opinion of management, the accompanying combined financial statements
contain all adjustments (which consist only of normal recurring accruals)
necessary to present fairly the combined financial position of CFC, RTFC and
GFC as of November 30, 1999 (unaudited) and May 31, 1999, and the combined
results of operations, cash flows and changes in members' equity for the six
months ended November 30, 1999 and 1998 (unaudited).
The Notes to Combined Financial Statements for the years ended May 31, 1999
and 1998 should be read in conjunction with the accompanying financial
statements. (See CFC's Form 10-K for the year ended May 31, 1999, filed on
August 27, 1999).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the assets, liabilities, revenues and expenses reported in the
financial statements, as well as amounts included in the notes thereto,
including discussion and disclosure of contingent liabilities. While CFC
uses its best estimates and judgments based on the known facts at the date of
the financial statements, actual results could differ from these estimates
as future events occur.
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<PAGE>
CFC does not believe it is vulnerable to the risk of a near term severe
impact as a result of any concentrations of its activities.
(b) Principles of Combination
The accompanying financial statements include the combined accounts of CFC,
RTFC and GFC, after elimination of all material intercompany accounts and
transactions. CFC has a $1,000 membership interest in RTFC and GFC. CFC
exercises control over RTFC and GFC through permanent majority representation
on their Boards of Directors. CFC manages the affairs of RTFC and GFC
through long-term management agreements. CFC services the loans for GFC for
which it collects a servicing fee. As of November 30, 1999, CFC had
committed to lend RTFC up to $10.0 billion to fund loans to its members and
their affiliates.
RTFC had outstanding loans and unadvanced loan commitments totaling $4,487.0
million and $3,809.6 million as of November 30, 1999 and May 31, 1999,
respectively. RTFC's net margins are allocated to RTFC's borrowers.
Summary financial information relating to RTFC is presented below:
(Unaudited)
At November 30, At May 31,
(Dollar amounts in thousands) 1999 1999
Outstanding loans to
members and their affiliates $3,350,561 $2,710,339
Total assets 3,595,062 2,893,810
Notes payable to CFC 3,319,973 2,693,675
Total liabilities 3,370,954 2,729,102
Members' equity and subordinated certificates 224,108 164,708
(Unaudited)
For the Six Months Ended November 30,
(Dollar amounts in thousands) 1999 1998
Operating income $105,606 $64,142
Net margin 1,923 1,982
Summary financial information relating to GFC is presented below:
(Unaudited)
At November 30, At May 31,
(Dollar amounts in thousands) 1999 1999
Outstanding loans to members $128,850 $130,940
Total assets 130,791 133,091
Notes payable to CFC 128,850 130,940
Total liabilities 130,413 132,861
Members' equity 378 230
(Unaudited)
For the Six Months Ended November 30,
(Dollar amounts in thousands) 1999 1998
Operating income $3,900 $4,058
Net margin 360 378
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on a
combined basis.
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<PAGE>
(c) Derivative Financial Instruments
CFC is neither a dealer nor a trader in derivative financial instruments.
CFC uses interest rate and currency exchange agreements to manage its
interest rate risk and foreign exchange risk. CFC accounts for these
agreements on an accrual basis. CFC does not value the interest rate
exchange agreements on its balance sheet, but values the underlying hedged
debt at cost. CFC does not recognize a gain or loss on these agreements,
but includes the difference between the interest rate paid and interest rate
received in the overall cost of funding. In the event that an agreement
were terminated early, CFC would record the fee paid or received due to the
early termination as part of the overall cost of funding.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". The statement
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that all derivatives be recognized
as an asset or liability in the statement of financial position and recorded
at fair value. The statement was originally effective for all fiscal years
beginning after June 15, 1999. The FASB has amended the statement to be
effective for all fiscal years beginning after June 15, 2000. CFC will be
required to implement this statement as of June 1, 2001. CFC has not yet
determined the impact of implementing this statement on its overall financial
position and results of operations.
(d) Segment Information
CFC has adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information". This statement establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. CFC operates in two business
segments - rural electric lending and rural telecommunications lending.
The segment disclosure has been included in Footnote 13. CFC uses the
same accounting principles for both segments.
(2) Debt Service Account
A provision of the 1972 Indenture between CFC and Chase Manhattan Bank as
trustee ("1972 Indenture") requires monthly deposits into a debt service
account held by the trustee, generally in amounts equal to one-twelfth of
the total annual interest payments, annual sinking fund payments and the
principal amount of bonds maturing within one year. These deposits may be
invested in permitted investments, as defined in the indenture (generally
bank certificates of deposit and prime rated commercial paper).
On February 15, 1994, CFC completed a new collateral trust bond indenture
("1994 Indenture") with First Bank National Association as trustee. This
indenture does not require the maintenance of a debt service account. All
collateral trust bonds issued since that date and all future collateral
trust bonds will be issued under this new Indenture.
(3) Loans Pledged as Collateral to Secure Collateral Trust Bonds
As of November 30, 1999 and May 31, 1999, mortgage notes representing
approximately $2,980.9 million and $3,016.9 million, respectively, related
to outstanding long-term loans to members, were pledged as collateral to
secure collateral trust bonds. Both the 1972 Indenture and the 1994
Indenture require that CFC pledge eligible mortgage notes (or other permitted
assets) as collateral that at least equal the outstanding balance of
collateral trust bonds. Under CFC's revolving credit agreement (see Footnote
6), CFC cannot pledge mortgage notes in excess of 150% of collateral trust
bonds outstanding.
Collateral trust bonds outstanding at November 30, 1999 and May 31, 1999
were $2,846.6 million and $2,996.3 million, respectively.
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(4) Allowance for Loan Losses
CFC maintains an allowance for loan losses at a level considered to
be adequate in relation to the quality and size of its loan and guarantee
portfolio. CFC makes regular additions to the allowance for loan losses.
These additions are required to maintain the allowance at an adequate level
based on the current year to date increase to loans outstanding and the
estimated loan growth for the next twelve months. On a quarterly basis, CFC
reviews the adequacy of the loan loss allowance and estimates the amount of
future provisions that will be required to maintain the allowance at an
adequate level based on estimated loan growth. The allowance is based on
estimates, and accordingly, actual loan losses may differ from the allowance
amount.
Activity in the allowance account is summarized as follows for the six months
ended November 30, 1999 and the year ended May 31, 1999.
November 30, May 31,
(Dollar amounts in thousands) 1999 1999
Beginning balance $212,203 $250,131
Provision for loan losses 17,355 23,866
Charge-offs, net of recoveries - (61,794)
Ending balance $229,558 $212,203
Total loan loss allowance as a percentage of:
Total loans 1.51% 1.55%
Total loans and guarantees 1.35% 1.38%
Total nonperforming and restructured loans 37.77% 36.69%
(5) Members' Subordinated Certificates
Members' subordinated certificates are subordinated obligations purchased by
members as a condition of membership and in connection with CFC's extension
of long-term loans and guarantees. Those issued as a condition of membership
(subscription capital term certificates) generally mature 100 years from
issuance date and bear interest at 5% per annum. Those issued as a condition
of receiving a loan or guarantee generally mature 46 to 50 years from
issuance or amortize proportionately based on the principal balance of the
credit extended, and are non-interest bearing or bear interest at varying
rates.
The proceeds from certain non-interest bearing subordinated certificates
issued in connection with CFC's guarantees of member's tax-exempt bonds are
pledged by CFC to the debt service reserve fund established in connection
with the bond issue, and any earnings from the investment of the fund inure
solely to the benefit of the member.
(6) Credit Arrangements
As of November 30, 1999, CFC had three revolving credit agreements totaling
$5,492.5 million which are used principally to provide liquidity support for
CFC's outstanding commercial paper, commercial paper issued by the National
Cooperative Services Corporation ("NCSC") and guaranteed by CFC and the
adjustable or floating/fixed rate bonds which CFC has guaranteed and is
standby purchaser for the benefit of its members.
Under a five-year agreement, executed in November 1996, CFC can borrow
$2,402.5 million until November 26, 2001. J.P. Morgan Securities Inc. and
The Bank of Nova Scotia were co-Syndication Agents, and Chase Manhattan Bank
is the Administrative Agent for this agreement that is with 55 banks. Any
amounts outstanding under the multi-year facility will be due on the maturity
date. On September 30, 1999, a 364-day agreement for $2,540.0 million was
executed with 31 banks including: Chase Manhattan Bank as Administrative
Agent, Bank of America, N.A. as Syndication Agent, The Bank of Nova Scotia
and Banc One, N.A. as Co-Documentation Agents and Chase Securities Inc. and
Bank of America Securities LLC as Joint Lead Arrangers. A third revolving
credit agreement for $550.0 million was also executed on September 30, 1999
with ten banks, including The Bank of Nova Scotia as Lead Arranger and
Administrative Agent (the "BNS facility") and Banc One, N.A. as Documentation
Agent. Both of the 364-day facilities have a revolving credit period that
terminates on September 29, 2000 during which CFC can borrow and such
borrowings may be converted to a one-year term loan at the end of the
revolving credit period.
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In connection with the five-year facility, CFC pays a per annum facility fee
of .090 of 1%. The per annum facility fee for both agreements with a 364-day
maturity is .085 of 1%. There is no commitment fee for any of the revolving
credit facilities. If CFC's senior secured debt ratings decline below AA-
or Aa3 and amounts outstanding exceed 50% of the total commitment, the
facility fees may be replaced with a utilization fee of .125 of 1%.
Generally, pricing options are the same under all three agreements and will
be at one or more rates as defined in the agreements, as selected by CFC.
The multi-year revolving credit agreement requires CFC, among other things
to maintain members' equity and members' subordinated certificates of at
least $1,373.9 million at May 31, 1999 (increased each fiscal year by 90% of
net margins not distributed to members). The revolving credit agreements
require CFC to achieve an average fixed charge coverage ratio over the six
most recent fiscal quarters of at least 1.025 and prohibits the retirement
of patronage capital unless CFC has achieved a fixed charge coverage ratio
of at least 1.05 for the preceding fiscal year. The revolving credit
agreements prohibit CFC from incurring senior debt (including guarantees but
excluding indebtedness incurred to fund RUS guaranteed loans) in an amount
in excess of ten times the sum of members' equity, members' subordinated
certificates and quarterly income capital securities and restricts, with
certain exceptions, the creation by CFC of liens on its assets and certain
other conditions to borrowing. The agreements also prohibit CFC from
pledging collateral in excess of 150% of the principal amount of collateral
trust bonds outstanding. Provided that CFC is in compliance with these
financial covenants (including that CFC has no material contingent or other
liability or material litigation that was not disclosed by or reserved
against in its most recent annual financial statements) and is not in
default, CFC may borrow under the agreements until the termination dates.
As of November 30, 1999 and May 31, 1999, CFC was in compliance with all
covenants and conditions under its revolving credit agreements and there
were no borrowings outstanding under such agreements.
Based on the ability to borrow under the five year facility, at November 30,
1999 and May 31, 1999, CFC classified $2,402.5 million, of its notes payable
outstanding as long-term debt. CFC expects to maintain more than $2,402.5
million of notes payable outstanding during the next twelve months. If
necessary, CFC can refinance such notes payable on a long-term basis by
borrowing under the five-year facility, subject to the conditions therein.
(7) Unadvanced Loan Commitments
As of November 30, 1999 and May 31, 1999, CFC had unadvanced loan
commitments, summarized by type of loan, as follows:
(Dollar amounts in thousands) November 30, 1999 May 31, 1999
Long-term $ 7,406,006 $ 7,004,692
Intermediate-term 374,132 299,659
Short-term 4,589,169 4,392,012
Telecommunications 1,136,476 1,111,741
Total unadvanced loan commitments $13,505,783 $12,808,104
Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have been
executed but funds have not been advanced. CFC may require additional
information to assure itself that all conditions for advance of funds have
been fully met and that there has been no material change in the member's
condition as represented in the documents supplied to CFC. Since commitments
may expire without being fully drawn upon, and a significant amount of the
commitments are for standby liquidity purposes, the total amounts reported
as commitments do not necessarily represent future cash requirements.
Collateral and security requirements for loan commitments are identical to
those for advanced loans.
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(8) Retirement of Patronage Capital
CFC patronage capital in the amount of $66.2 million was retired in August
1999, representing 70% of the allocation for fiscal year 1999 and one-sixth
of the total allocations for fiscal years 1989, 1990 and 1991. The $66.2
million includes $10.5 million retired to RTFC. GFC retired patronage
capital in the amount of $0.2 million representing 100% of the allocation for
fiscal year 1999. RTFC will retire 70% of its fiscal year 1999 allocation
later this fiscal year. Future retirements of patronage capital allocated
to patrons may be made annually as determined by CFC's, RTFC's and GFC's
Boards of Directors with due regard for CFC's, RTFC's and GFC's financial
condition.
(9) Guarantees
As of November 30, 1999 and May 31, 1999, CFC had guaranteed the following
contractual obligations of its members:
(Dollar amounts in thousands) November 30, 1999 May 31, 1999
Long-term tax-exempt bonds (A) $1,046,310 $1,062,185
Debt portions of leveraged
lease transactions (B) 172,317 174,961
Indemnifications of tax
benefit transfers (C) 272,652 285,169
Other guarantees (D) 286,630 162,150
Total guarantees $1,777,909 $1,684,465
(A) CFC has unconditionally guaranteed to the holders or to trustees for
the benefit of holders of these bonds the full principal, premium (if any)
and interest payments on each bond when due. In the event of default, the
bonds cannot be accelerated as long as CFC makes the scheduled debt service
payments. In addition, CFC has agreed to make up, at certain times,
deficiencies in the debt service reserve funds for some of these issues of
bonds. Of the amounts shown, $933.8 million and $947.3 million as of
November 30, 1999 and May 31, 1999, respectively, are adjustable or
floating/fixed rate bonds. The interest rate on such bonds may be converted
to a fixed rate as specified in the indenture for each bond offering.
During the variable rate period (including at the time of conversion to a
fixed rate), CFC has unconditionally agreed to purchase bonds tendered or
called for redemption if such bonds are not sold to other purchasers by the
remarketing agents.
(B) CFC has unconditionally guaranteed the repayment of debt raised by NCSC
for leveraged lease transactions.
(C) CFC has unconditionally guaranteed to lessors certain indemnity payments
which may be required to be made by the lessees in connection with tax
benefit transfers. The amounts of such guarantees reach a maximum and then
decrease over the life of the lease.
(D) At November 30, 1999 and May 31, 1999, CFC had unconditionally
guaranteed commercial paper, along with a related interest rate exchange
agreement, issued by NCSC of $150.6 million and $63.7 million, respectively.
(10) Derivative Financial Instruments
At November 30, 1999 and May 31, 1999, CFC was a party to interest rate
exchange agreements with notional amounts totaling $3,407.7 million and
$2,796.0 million, respectively. CFC uses interest rate exchange agreements
as part of its overall interest rate matching strategy. Interest rate
exchange agreements are used when they provide CFC a lower cost of funding
option or minimize interest rate risk. CFC will only enter interest rate
exchange agreements with highly rated financial institutions. At November
30, 1999 and May 31, 1999, CFC was using interest rate exchange agreements
to fix the interest rate on $2,431.3 million and $1,996.0 million,
respectively, of its variable rate commercial paper. CFC was also using
interest rate exchange agreements at both dates to minimize the variance
between the three month LIBOR rate and CFC's variable commercial paper rate
totaling $976.4 million and $750.0 million at November 30, 1999 and May 31,
1999. All of CFC's derivative financial instruments were held for purposes
other than trading. CFC has not invested in derivative financial
instruments for trading purposes in the past and does not anticipate doing
so in the future.
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The following table lists the notional principal amounts of CFC's interest
rate exchange agreements at November 30, 1999 and May 31, 1999:
<TABLE>
<CAPTION>
Notional Principal Amount Notional Principal Amount
Maturity Date November 30, May 31, Maturity Date November 30, May 31,
1999 1999 1999 1999
(Dollar amounts in thousands) (Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
June 1999 (1) $ - $ 50,000 August 2003 (3) $ 25,000 $ 25,000
September 1999 (2) - 75,000 September 2003 (3) 16,600 16,600
September 1999 (2) - 75,000 September 2003 (3) 17,845 17,844
September 1999 (2) - 75,000 September 2003 (3) 28,000 28,000
September 1999 (2) - 75,000 September 2003 (3) 28,785 28,785
November 1999 (2) - 50,000 October 2003 (3) 22,991 32,533
November 1999 (2) - 50,000 October 2003 (3) 22,991 32,533
November 1999 (2) - 50,000 October 2003 (3) 22,594 25,480
November 1999 (2) - 75,000 September 2004 (3) 15,080 17,650
November 1999 (2) - 75,000 October 2004 (3) 25,700 38,000
November 1999 (2) - 75,000 October 2004 (3) 62,500 -
November 1999 (2) - 75,000 October 2004 (3) 62,500 -
January 2000 (3) 52,851 52,851 November 2004 (3) 61,000 61,000
June 2000 (2) 250,000 - November 2004 (3) 61,000 61,000
June 2000 (2) 200,000 - January 2005 (3) 8,000 8,000
June 2000 (2) 150,000 - April 2006 (3) 25,000 25,000
June 2000 (2) 75,000 - April 2006 (3) 25,000 25,000
July 2000 (2) 50,000 - April 2006 (3) 25,000 25,000
July 2000 (2) 100,000 - April 2006 (3) 25,000 25,000
July 2000 (2) 26,363 - January 2008 (3) 14,000 14,000
July 2000 (2) 100,000 - July 2008 (3) 40,400 40,400
July 2000 (2) 25,000 - September 2008 (3) 26,235 26,235
August 2000 (3) 110,000 110,000 September 2008 (3) 9,895 10,425
August 2000 (3) 110,000 110,000 September 2008 (3) 9,680 10,300
September 2000 (3) 6,140 7,450 September 2008 (3) 20,600 20,600
September 2000 (3) 4,270 13,355 October 2008 (3) 33,512 33,512
September 2000 (3) 50,000 - April 2009 (3) 33,000 33,000
September 2000 (3) 200,000 - September 2010 (3) 43,000 -
October 2000 (3) 20,000 20,000 January 2012 (3) 13,000 13,000
January 2001 (3) 42,749 42,749 February 2012 (3) 9,500 10,000
January 2001 (3) 23,000 23,000 December 2013 (3) 65,000 65,000
February 2001 (3) 75,000 75,000 December 2013 (3) 65,000 65,000
February 2001 (3) 75,000 75,000 December 2013 (3) 45,100 45,100
February 2001 (3) 75,000 75,000 June 2014 (3) - 18,250
February 2001 (3) 75,000 75,000 June 2018 (3) 5,000 5,000
September 2001 (3) 34,810 34,810 September 2020 (3) 43,000 -
January 2003 (3) 10,000 10,000 December 2026 (3) 48,185 48,185
January 2003 (3) 12,375 12,375 September 2028 (3) 59,220 60,000
June 2003 (3) 48,000 48,000 September 2028 (3) 59,220 60,000
August 2003 (3) 25,000 25,000 April 2029 (3) 66,000 66,000
August 2003 (3) 50,000 50,000 September 2030 (3) 43,000 -
$3,407,691 $2,796,022
</TABLE>
(1) Under these agreements, CFC pays a variable rate of interest and
receives a fixed rate of interest.
(2) Under these agreements, CFC pays a variable rate of interest
and receives a variable rate of interest.
(3) Under these agreements, CFC pays a fixed rate of interest and receives
interest based on a variable rate.
14
<PAGE>
CFC does not value the interest rate exchange agreements on its balance
sheet, but rather values the underlying hedged debt instruments at historical
cost. All amounts that CFC pays and receives related to the interest rate
exchange agreements and the underlying hedged debt instruments are included
in CFC's cost of funding for the period. In all interest rate exchange
agreements, CFC receives the amount required to service the debt outstanding
to its investors from the counter-party to the agreement. The estimated fair
value of CFC's interest rate exchange agreements is presented in the
footnotes to the financial statements of CFC's Form 10-K for the year ended
May 31, 1999.
CFC closely matches the terms of its interest rate exchange agreements with
the terms of the underlying debt instruments. Therefore, it is unlikely
that CFC would prepay debt that is hedged or have hedged debt mature prior
to the maturity of the interest rate exchange agreement. However,
circumstances may arise that cause either CFC or the counter-party to the
agreement to exit such agreement. In the event of such actions, CFC would
record a gain or loss from the termination of the interest rate exchange
agreement.
During the six months ended November 30, 1999, CFC has issued medium-term
notes to European investors in foreign-currencies. The following chart
provides details of the foreign-currency swaps that CFC has outstanding at
November 30, 1999:
(Dollar amounts in thousands)
Type of U.S. Foreign
Debt (1) Issue Date Maturity Date Dollars Currency (2) Rate
MTN February 24, 1999 February 24, 2006 390,250 350,000 EU 1.115
July 14, 1999 July 14, 2000 23,363 15,000 GBP 1.558
August 13, 1999 August 14, 2000 24,225 15,000 GBP 1.615
(1) MTN - CFC medium-term notes
(2) EU - Euros, GBP - British Pound Sterling
CFC enters into a swap to sell the amount of foreign-currency received from
the investor for U.S. Dollars on the issuance date and to buy the amount of
foreign-currency required to repay the investor principal and interest due
through or on the maturity date. By locking in the exchange rates at the
time of issuance, CFC has eliminated the possibility of any currency gain or
loss which might otherwise have been produced by the foreign-currency
borrowing. CFC includes the difference between the amount of U.S. Dollars
received at issuance and the amount of U.S. Dollars required to purchase the
foreign-currency at the interest payment dates and at maturity as interest
expense.
Principal and interest is paid at maturity, which ranges from 1 day to 270
days on CFC commercial paper investments. Interest is paid annually on
foreign-currency denominated medium-term notes with maturities longer than
one year. CFC considers the cost of all related foreign-currency swaps as
part of the total cost of debt issuance when deciding on whether to issue
debt in the U.S. or foreign capital markets and whether to issue the debt
denominated in U.S. or foreign-currencies.
(11) Contingencies
(a) At November 30, 1999 and May 31, 1999, CFC had non-performing loans in
the amount of $29.6 million and $1.6 million and restructured loans in the
amount of $578.1 million and $576.7 million, respectively. At both dates
$1.6 million of loans classified as non-performing were on non-accrual status
with respect to the recognition of interest income and all loans classified
as restructured were on accrual status with respect to the recognition of
interest income. A total of $0.2 million and $11.3 million of interest
income was accrued on non-performing and restructured loans, respectively,
for the six months ended November 30, 1999.
(b) CFC classified $579.7 million and $578.3 million of the amount
described in footnote 11(a) as impaired with respect to the provisions of
FASB Statements No. 114 and 118 at November 30, 1999 and May 31, 1999,
respectively. CFC had allocated $96.0 million and $101.0 million of the
loan loss allowance for such impaired loans at November 30, 1999 and May 31,
1999, respectively. The amount of loan loss allowance allocated for such
loans was based on a comparison of the present value of the expected future
cashflow associated with the loan and/or the estimated fair value of the
collateral securing the loan to the recorded investment in the loan. CFC
accrued interest income totaling $11.3 million on loans classified as
impaired during the six months ended November 30, 1999. The average recorded
investment in impaired loans for the six months ended November 30, 1999 was
$579.6 million compared to $460.1 million for the year ended May 31, 1999.
15
<PAGE>
(c) Deseret Generation & Transmission Co-operative ("Deseret") is a
power supply member of CFC located in Utah. Deseret owns and operates the
Bonanza generating plant ("Bonanza") and owns a 25% interest in the Hunter
generating plant along with a system of transmission lines. Deseret also
owns and operates a coal mine, through its Blue Mountain Energy subsidiary.
Due to large anticipated demands for electricity, the Bonanza site was
designed for two plants and Deseret built the infrastructure to support two
plants (only one plant has been built to date). When the large increases in
demand never materialized, Deseret was unable to make the debt payment
obligations on the Bonanza plant and debt service payments to RUS. As a
consequence, Deseret and its creditors entered into several restructuring
agreements.
On October 16, 1996 Deseret and CFC entered into an Obligations Restructuring
Agreement (the "ORA") for the purpose of restructuring Deseret's debt with
CFC. Pursuant to the terms of the ORA, CFC agreed to (i) forbear from
exercising any remedy to collect the CFC Debt (as defined in the ORA) and
(ii) pay and perform on all of the CFC Guarantees (as defined in the ORA) in
consideration for Deseret agreeing to make quarterly minimum payments to CFC
through December 31, 2025. In addition to the quarterly minimum payments,
Deseret is required to pay to CFC certain percentages of its excess cash
flow and proceeds from the disposition of assets, as detailed in the ORA.
If Deseret performs all of its obligations under the ORA, CFC has agreed to
forgive any remaining CFC Debt on December 31, 2025. To date, Deseret has
made all required payments under the ORA. Certain creditors did not
participate in the ORA which resulted in litigation.
In connection with the ORA, on October 16, 1996, CFC acquired all of
Deseret's indebtedness in the outstanding principal amount of $740.0 million
from RUS for the sum of $238.5 million (the "RUS Debt"). As a result of the
purchase, CFC holds a majority of Deseret's outstanding secured debt.
Pursuant to a participation agreement dated October 16, 1996, the member
systems of Deseret purchased from CFC, for $55.0 million, a participation
interest in the RUS Debt. The members' purchase of participation interests
in the RUS Debt acquired by CFC ("Participation Loans") are secured by the
assets and revenues of the member systems. Under the participation agreement
the Deseret members will receive a share of the minimum quarterly payments
that Deseret makes to CFC, which the members will use to service their
Participation Loans. Each member of Deseret had the option to put its
Participation Loan back to CFC at any time after twelve years, provided that
no event of default existed under the ORA and under such member's
Participation Loan. The ORA was subsequently amended to allow the Deseret
member distribution systems to put the Participation Loans back to CFC
unconditionally on December 31, 2019.
On December 4, 1998, CFC, Deseret, the Deseret member systems, and all other
parties involved in the ongoing litigation entered into a settlement
arrangement. On December 14, 1998, CFC effected the redemption of the
Bonanza Secured Lease Obligation Bonds. The amount advanced to redeem the
bonds, $265.9 million ($255.1 million principal and $10.8 million of accrued
interest), became part of the outstanding loan balance to Deseret and is
secured by CFC's mortgage claim on all of Deseret's assets and future
revenues. This amount will be repaid through the annual ORA minimum and
excess cashflow payments Deseret is required to make to CFC through December
31, 2025.
In July 1999, Deseret, Riverside and CFC reached an agreement with respect
to the settlement of the Riverside FERC and Utah state litigation. Under
the terms of the agreement, Deseret and Riverside agreed to amend the Power
Service Agreement ("PSA") with respect to rates, terms and conditions for
service thereunder. On July 29, 1999, Riverside paid Deseret $25.1 million
to buy down the rate Deseret charges Riverside for power commencing in July
2002. In order to facilitate the settlement, CFC issued an irrevocable
letter of credit to Riverside for the account of Deseret in the amount of
$25.1 million, which may be drawn upon by Riverside upon the occurrence of
certain events more particularly described therein, including Deseret's
failure to perform certain obligations under the PSA and the FERC's failure
to approve the settlement. Any draw under the letter of credit converts to
a long-term loan to Deseret which is repayable upon the terms set forth in a
reimbursement agreement.
Deseret and Riverside filed the amended PSA and a Settlement Agreement to
which CFC is a party with the FERC on July 28, 1999, together with an
Uncontested Motion for Interim Rate Approval. FERC approved the Motion on
August 3, 1999. On August 20, 1999, the administrative law judge certified
the Settlement Agreement and amended PSA to the FERC for approval. The
Commission is expected to act in early calendar year 2000. On March 24,
1998, the City of Anaheim, California ("Anaheim") commenced an action
against Deseret that was consolidated with the Riverside proceeding.
Anaheim also filed a complaint with the FERC. In January 1999,
16
<PAGE>
Deseret and Anaheim agreed to a settlement of the FERC and civil actions.
The settlement will not significantly impact the revenue received by
Deseret over the life of the contract with Anaheim.
As of November 30, 1999 and May 31, 1999, all loans to Deseret were on an
accrual status at a rate of 3.90%. The rate at which interest accrues will
be adjusted from time to time as events require to reflect the current
estimate of the amount CFC will receive through December 31, 2025.
At November 30, 1999 and May 31, 1999, CFC had the following exposure to
Deseret:
(Dollar amounts in millions) November 30, 1999 May 31, 1999
Loans outstanding (1) $578.1 $576.7
Guarantees outstanding:
Tax benefit transfers 3.2 3.2
Equipment leases 49.2 51.6
Other (2) 37.7 12.6
Total guarantees 90.1 67.4
Total exposure $668.2 $644.1
(1) As of November 30, 1999, the loan balance of $578.1 million to Deseret
is comprised of $180.5 million of cashflow shortfalls related to Deseret's
debt service and rental obligations guaranteed by CFC, $265.9 million
related to the redemption of the Bonanza secured lease obligation bonds,
$103.7 million related to the purchase of RUS loans, $17.7 million related
to the original CFC loan to Deseret and $10.4 million related to the
settlement of the foreclosure litigation.
(2) Other guarantees includes irrevocable letters of credit and a guarantee
of certain operations and maintenance expenses.
Deseret has made all payments required by the ORA. To date, during calendar
year 1999, CFC has received a total of $34.4 million.
Based on its analysis, CFC believes that it has adequately reserved for any
potential loss on its loans and guarantees to Deseret.
(d) At November 30, 1999, two other borrowers were in payment default
to CFC on secured loans totaling $29.6 million. At May 31, 1999, there was
one other borrower in payment default to CFC on secured loans totaling
$1.6 million.
(12) Loans Guaranteed by RUS
At November 30, 1999 and May 31, 1999, CFC held $128.9 million in trust
certificates related to the refinancing of Federal Financing Bank loans.
These trust certificates are supported by payments from certain CFC power
supply members whose payments are guaranteed by RUS.
CFC is an approved lender under the RUS loan guarantee program. At
November 30, 1999, CFC had $26.0 million of loans outstanding under this
program.
(13) Segment Information
CFC operates in two business segments - rural electric lending and rural
telecommunications lending. Summary financial information relating to each
segment is presented below.
The information reviewed by management on a regular basis is the combined
financial statements and the stand-alone RTFC financial statements. The
information presented below includes the stand-alone RTFC financial
statements for the telecommunications systems, the combined financial
statements as the total and the difference between the RTFC and the combined
is presented for the electric systems. All activity is with electric or
telecommunications systems.
17
<PAGE>
RTFC is an associate member of CFC and CFC is the sole funding source for
RTFC. RTFC borrows from CFC and then relends to the telecommunications
systems. RTFC pays an administrative fee to CFC for work performed by CFC
staff as part of the interest rate on the loans from CFC. RTFC does not
maintain a loan loss allowance, but CFC maintains a loss allowance on its
loans to RTFC.
The following chart contains the Income Statement for the six months ended
November 30, 1999 and the total assets at November 30, 1999.
(Dollar amounts in thousands)
Electric Systems Telecommunications Systems Total Combined
Income statement:
Income from loans $ 363,649 $ 105,606 $ 469,255
Cost of funds 292,459 103,542 396,001
Gross margin 71,190 2,064 73,254
Operating expenses 10,982 179 11,161
Loan loss provision 17,355 - 17,355
Total expenses 28,337 179 28,516
Operating Margin 42,853 1,885 44,738
Other income 803 38 841
Net margin $ 43,656 $ 1,923 $ 45,579
Assets:
Loans outstanding,
net (1) $11,615,345 $ 3,350,561 $14,965,906
Other assets 203,521 244,501 448,022
Total assets $11,818,866 $ 3,595,062 $15,413,928
(1) Net loans are calculated by prorating the loan loss allowance and
subtracting this allowance from gross loans outstanding.
The following chart contains the Income Statement for the six months ended
November 30, 1999 and the total assets at November 30, 1998.
(Dollar amounts in thousands)
Income statement:
Income from loans $ 308,239 $ 64,142 $ 372,381
Cost of funds 248,270 62,097 310,367
Gross margin 59,969 2,045 62,014
Operating expenses 11,507 86 11,593
Loan loss provision 15,780 - 15,780
Total expenses 27,287 86 27,373
Operating Margin 32,682 1,959 34,641
Other income 1,059 23 1,082
Net margin $ 33,741 $ 1,982 $ 35,723
Assets:
Loans outstanding,
net (1) $ 9,632,417 $ 2,143,822 $11,776,239
Other assets 253,975 153,629 407,604
Total assets $ 9,886,392 $ 2,297,451 $12,183,843
(1) Net loans are calculated by prorating the loan loss allowance and
subtracting this allowance from gross loans outstanding.
18
<PAGE>
Part I. Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(Dollar amounts in millions)
The management discussion and analysis contains statements that may be
considered forward looking. In making these statements, CFC has made
estimates and assumptions discussed in this presentation, which could cause
the actual results to differ materially.
The following discussion and analysis is designed to provide a better
understanding of the CFC's combined financial condition and results of
operations and as such should be read in conjunction with the Combined
Financial Statements, including the notes thereto.
Financial Condition
At November 30, 1999, CFC had $15,414 in total assets, an increase of
$1,489 or 10.7% over May 31, 1999. Net loans outstanding to members
totaled $14,966 at November 30, 1999 an increase of $1,475 compared to
a total of $13,491 at May 31, 1999. Net loans represented 97.1% and 96.9%
of total assets at November 30, 1999 and May 31, 1999, respectively. The
remaining assets, $448 and $434 at November 30, 1999 and May 31, 1999,
respectively, consisted of other assets to support CFC's operations. Except
as required for the debt service account and unless excess cash is invested
overnight, generally CFC does not use funds to invest in debt or equity
securities.
Loans outstanding at:
November 30, 1999 May 31, 1999 Increase
Long-term loans:
Electric $ 9,738.7 $ 9,132.7 $ 606.0
Telephone 2,927.5 2,354.8 572.7
Total long-term loans 12,666.2 11,487.5 1,178.7
Intermediate-term loans:
Electric 302.0 301.1 0.9
Telephone 13.5 13.5 -
Total intermediate-term loans 315.5 314.6 0.9
Short-term loans:
Electric 1,069.6 850.0 219.6
Telephone 381.6 342.1 39.5
Total short-term loans 1,451.2 1,192.1 259.1
RUS guaranteed loans 154.9 130.9 24.0
Non-performing loans 29.6 1.6 28.0
Restructured loans 578.1 576.7 1.4
Total loans 15,195.5 13,703.4 1,492.1
Loan loss allowance 229.6 212.2 17.4
Net loans $14,965.9 $13,491.2 $1,474.7
Percentage of loans with a
fixed interest rate 58% 63%
Percentage of loans with a
variable interest rate 42% 37%
There were a number of reasons underlying the increased demand for CFC loan
advances, including (1) the strong economy, which has spurred construction
and business development; (2) RUS waiting periods are at an all time high,
which caused more borrowers to buyout their RUS debt and/or make greater use
of CFC 100% loan funds; (3) a large number of systems have bought out their
RUS debt over the last few years, requiring them to seek non-RUS financing;
19
<PAGE>
(4) some borrowers have begun to expand and diversify their operations
through acquisitions and mergers; and (5) growth in demand for both existing
and new telecommunications technologies.
Long-term loans represented 88% and 89% of loans outstanding at November 30,
1999 and May 31, 1999, respectively. Long-term fixed rate loans represented
58% and 63% of the total loans at November 30, 1999 and May 31, 1999,
respectively. Loans converting from a variable rate to a fixed rate for
the six months ended November 30, 1999 totaled $14, a decrease from the
$1,221 that converted for the six months ended November 30, 1998. Offsetting
the conversions to the fixed rate were $6 and $1 of loans that converted
from the fixed rate to the variable for the six months ended November 30,
1999 and 1998, respectively. This resulted in a net conversion of $8 from
the variable rate to a fixed rate for the six months ended November 30, 1999
compared to a net conversion of $1,220 for the year ended November 30, 1998.
Guarantees outstanding:
November 30, May 31, Inc / (Dec)
1999 1999
Tax-exempt bonds $1,046.3 $1,062.2 $(15.9)
Lease transactions 172.3 175.0 (2.7)
Indemnifications of
tax benefit transfers 272.7 285.2 (12.5)
Other guarantees 286.6 162.1 124.5
Total $1,777.9 $1,684.5 $ 93.4
The increase in guarantees outstanding for the six months ended November 30,
1999, was due to the increase in other guarantees. The increase to other
guarantees was due to the issuance of irrevocable letters of credit related
to Deseret and an increase to the balance of NCSC commercial paper guaranteed
by CFC.
Total credit committed at:
November 30, May 31, Inc / (Dec)
1999 1999
Loans $15,195.5 $13,703.4 $1,492.1
Unadvanced commitments 13,505.8 12,808.1 697.7
Guarantees 1,777.9 1,684.5 93.4
Total $30,479.2 $28,196.0 $2,283.2
At November 30, 1999, CFC had unadvanced commitments totaling $13,506, an
increase of $698 over the balance of $12,808 at May 31, 1999. Unadvanced
commitments include loans approved by CFC for which loan contracts have not
yet been executed or for which contracts have been executed, but funds have
not been advanced. The majority of the short-term unadvanced commitments
provide backup liquidity to CFC borrowers, and therefore CFC does not
anticipate funding most of such commitments. Approximately 38% of the
outstanding commitments at November 30, 1999 were for short-term or line of
credit loans. To qualify for the advance of funds under all commitments, a
borrower must assure CFC that there has been no material change since the
loan was approved. The increase to commitments during the six months ended
November 30, 1999, was due to the power vision program. Power vision is a
program under which CFC performed a review of its borrowers and pre-approved
additional loan funds for a number of borrowers.
At November 30, 1999, total credit commitments outstanding represented an
increase of 8% over the total at May 31, 1999.
20
<PAGE>
Debt outstanding at:
November 30, May 31, Inc / (Dec)
1999 1999
Notes payable:
Commercial paper $ 6,372.2 $ 5,871.2 $ 501.0
Bank bid notes 95.0 375.0 (280.0)
Long-term debt 2,325.0 1,133.0 1,192.0
Commercial paper
reclassified as L/T (2,402.5) (2,402.5) -
Total notes payable 6,389.7 4,976.7 1,413.0
Long-term debt:
Collateral trust bonds 2,846.6 2,846.3 0.3
Medium-term notes 1,634.5 1,642.3 (7.8)
Commercial paper
reclassified as L/T 2,402.5 2,402.5 -
Total long-term debt 6,883.6 6,891.1 (7.5)
QUICS 400.0 400.0 -
Total debt outstanding $13,673.3 $12,267.8 $1,405.5
Percentage of short-term debt 47% 41%
Percentage of long-term debt 53% 59%
Percentage of fixed rate debt (1) 55% 58%
Percentage of variable rate debt (2) 45% 42%
(1) Includes fixed rate collateral trust bonds, medium-term notes and QUICS
plus commercial paper with rates fixed through interest rate exchange
agreements.
(2) The rate on commercial paper notes does not change once the note has
been issued. However, the rates on new commercial paper notes change daily
and commercial paper notes generally have maturities of less than 90 days.
Therefore, commercial paper notes are considered to be variable rate debt by
CFC. Also included are variable rate collateral trust bonds and medium-term
notes.
Liabilities and members' equity totaled $15,414 at November 30, 1999 an
increase of $1,489 or 10.7% over the balance of $13,925 at May 31, 1999.
The increase to total liabilities and members' equity for the six months
ended November 30, 1999 was primarily due to increases in short-term debt
required to fund the increase in loans outstanding. Total debt outstanding
at November 30, 1999 was $13,673 an increase of $1,405 over the May 31, 1999
balance of $12,268.
Members' subordinated certificates and members' equity outstanding at:
November 30, May 31, Inc / (Dec)
1999 1999
Subordinated certificates:
Membership certificates $ 642.0 $ 641.9 $ 0.1
Loan certificates 484.4 422.8 61.6
Guarantee certificates 182.2 175.1 7.1
Total certificates 1,308.6 1,239.8 68.8
Equity:
Memberships 1.5 1.5 -
Allocated margins 224.7 290.7 (66.0)
Education fund 0.4 0.5 (0.1)
Year-to-date unallocated
margins 47.9 2.3 45.6
Total equity 274.5 295.0 (20.5)
Total equity and certificates $1,583.1 $1,534.8 $ 48.3
Membership certificates are required to be purchased as a condition of
becoming a CFC member. The majority of membership certificates outstanding
and all new membership certificates have an original maturity of 100 years
and pay interest at 5%. A small portion of membership certificates have an
original maturity of 50 years and pay interest at a rate of 3%. Members are
required to purchase certificates with each new loan and guarantee,
depending on the borrower's internal leverage ratio with CFC. Subordinated
certificates are junior to all debt issued by CFC.
21
<PAGE>
Cooperatives are required to pay a one-time fee to become a member. The fee
varies from two hundred dollars to a thousand dollars depending on the
membership class. CFC maintains current year net margins as unallocated
through the end of its fiscal year. All net margins earned for the year are
allocated back to the members. A small portion of annual net margins is
placed in the education fund, which is distributed to the statewide
cooperatives to assist with the teaching of cooperative principles. CFC
immediately retires 70% of the allocated net margins for the prior year and
holds the remaining 30% as allocated margins, which are currently retired
after 15 years. All retirements of allocated margins are subject to approval
by the Board of Directors. CFC does not pay interest on the allocated but
unretired margins.
The decrease to members' subordinated certificates and equity for the six
months ended November 30, 1999 is due to the retirement of patronage capital
offset by the issuance of new loan certificates related to loan advances and
current year net margins.
CFC's leverage ratio increased to 7.59 during the six months ended
November 30, 1999, from 7.00 at May 31, 1999. The ratio is calculated after
excluding from debt the quarterly income capital securities and all debt
associated with the funding of the RUS 100% guaranteed loans. Members'
subordinated certificates and quarterly income capital securities are
treated as equity in the calculation of the leverage ratio. CFC
contemplates that its leverage ratio will continue to increase modestly as
it obtains external capital to accommodate its loan growth. CFC will retain
the flexibility to further amend its capital retention policies to retain
members' investments in CFC consistent with maintaining acceptable financial
ratios.
CFC's debt/equity ratio increased from 5.52 at May 31, 1999, to 6.00 at
November 30, 1999. The ratio is calculated by dividing debt outstanding,
excluding quarterly income capital securities and debt used to fund loans
guaranteed by RUS, by the total of members' subordinated certificates,
members' equity, the loan loss allowance and quarterly income capital
securities.
Margin Analysis
CFC uses an interest coverage ratio instead of the dollar amount of gross or
net margins as its primary performance indicator, since CFC's net margins
are subject to fluctuation as interest rates change. Management has
established a 1.10 Times Interest Earned Ratio ("TIER") as its minimum
operating objective. CFC has earned a TIER of 1.12 for the six months ended
November 30, 1999 and 1998. TIER is a measure of CFC's ability to cover the
interest expense on funding.
Results for six months ended November 30, 1999 versus November 30, 1998
Net margins for the six months ended November 30, 1999, were $45.6, an
increase of $9.9 over the $35.7 earned the prior year.
Net margins for the six months ended:
November 30, November 30, Inc / (Dec)
1999 1998
Interest income $469.3 $372.4 $ 96.9
Cost of funds 396.0 310.4 85.6
Gross margin 73.3 62.0 11.3
General & administrative
expenses 11.1 11.6 (0.5)
Loan loss provision 17.4 15.8 1.6
Total expenses 28.5 27.4 1.1
Operating margin 44.8 34.6 10.2
Non-operating income 0.8 1.1 (0.3)
Net margin $ 45.6 $ 35.7 $ 9.9
TIER 1.12 1.12
22
<PAGE>
Net margins expressed as a percentage of average loans outstanding for the
six months ended:
November 30, 1999 November 30, 1998 Inc / (Dec)
Interest income 6.49% 6.65% (0.16)%
Cost of funds 5.48% 5.54% (0.06)%
Gross margin 1.01% 1.11% (0.10)%
General & administrative
expenses 0.15% 0.21% (0.06)%
Loan loss provision 0.24% 0.28% (0.04)%
Total expenses 0.39% 0.49% (0.10)%
Operating margin 0.62% 0.62% 0.00%
Non-operating income 0.01% 0.02% (0.01)%
Net margin 0.63% 0.64% (0.01)%
Average loan volume for the six months ended November 30, 1999 totaled
$14,425.8, an increase of $3,253.3 or 29% over the average loan balance of
$11,172.5 for the prior year period. The increase to net margins for the
six month period ended November 30, 1999 was due to the increase in loan
volume as compared to the prior year period. The average yield earned on
the loan portfolio has decreased slightly as did the average cost of funds.
The decrease to the average yield and cost of funding for the six months
ended November 30, 1999 as compared to the prior year was due to a slight
reduction in the percentage of loans outstanding at fixed interest rates as
well as a lower cost of variable rate funds in the capital markets. The
lower cost of variable rate funds resulted in lower variable interest rates
for the six months ended November 30, 1999 as compared to the prior year.
The total dollar amount of operating expenses decreased slightly for the six
months ended November 30, 1999 compared to the prior year; however, when
presented as a percentage of average loan volume, operating expenses
decreased by 6 basis points or 29% from the prior year.
Loan and Guarantee Portfolio Assessment
Portfolio Diversity
CFC and its combined affiliates make loans and provide financial guarantees
to their qualified members. The combined memberships include rural electric
distribution systems, rural power supply systems, service organizations
(statewide rural electric and national associations), associate organizations
and telecommunication systems
The following chart summarizes loans and guarantees outstanding by member
class at November 30, 1999 and May 31, 1999.
November 30, 1999 May 31, 1999
Amount % of Amount % of
Outstanding Total Outstanding Total
Electric systems:
Distribution $ 9,358.3 55.1% $ 8,719.3 56.7%
Power supply 3,746.3 22.1% 3,538.8 23.0%
Service organizations 407.4 2.4% 315.9 2.0%
Associate members 110.8 0.7% 103.6 0.7%
Subtotal electric
systems $13,622.8 80.3% $12,677.6 82.4%
Telecommunication systems:
Local exchange carrier $ 2,093.0 12.3% $ 1,688.2 11.0%
Cable 142.3 0.8% 128.9 0.8%
Cellular 266.5 1.6% 272.0 1.8%
Personal communications
systems 401.2 2.4% 303.5 2.0%
Other 447.6 2.6% 317.7 2.0%
Subtotal telecommunications
systems 3,350.6 19.7% 2,710.3 17.6%
Total $16,973.4 100.0% $15,387.9 100.0%
23
<PAGE>
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. At November 30, 1999, the total exposure
outstanding to any one borrower (excluding loans guaranteed by RUS) did not
exceed 4.0% of total loans and guarantees outstanding. At November 30, 1999
and May 31, 1999, CFC had $3,054 and $2,242, respectively, in loans
outstanding, excluding loans guaranteed by RUS to its largest 10 borrowers.
At the same dates, CFC had $548 and $703, respectively, in guarantees
outstanding to its largest 10 borrowers. The amounts outstanding to the
largest 10 borrowers at November 30, 1999 and May 31, 1999, represented 20%
and 16%, respectively, of total loans outstanding and 31% and 42%,
respectively, of total guarantees outstanding. Total credit exposure to the
largest 10 borrowers at November 30, 1999 and May 31, 1999 represented 21%
and 19%, respectively, of total credit exposure. At November 30, 1999, the
largest 10 borrowers included 4 distribution systems, 4 power supply systems
and 2 telephone systems.
Security Provisions
Except when providing lines of credit, CFC typically lends to its members on
a first lien secured basis. At November 30, 1999, a total of $1,374 of loans
were unsecured representing 9.0% of total loans and 8.1% of total loans and
guarantees. At May 31, 1999, a total of $1,231 of loans were unsecured
representing 9.1% of total loans and 8.1% of total loans and guarantees. As
of November 30, 1999 and May 31, 1999, approximately $169 or 12.3% and $163
or 13.2%, respectively, of the unsecured loans represent obligations of
distribution borrowers for the initial phase(s) of RUS note buyouts. Upon
completion of a borrower's buyout from RUS, CFC receives first lien security
on all assets and future revenues. As of November 30, 1999 and May 31,
1999, the unsecured loans would represent 7.9% and 7.8% of total loans and
7.1% and 6.9% of total loans and guarantees, respectively, if these partial
note buyout obligations were excluded. CFC's long-term loans are typically
secured on a first lien basis, pro-rata with any other secured lenders
(primarily RUS) by all assets and future revenues of the borrower. Short-
term loans are generally unsecured lines of credit. Guarantees are secured
on a first lien basis, pro-rata with other secured creditors by all assets
and future revenues of the borrower or by the underlying financed asset. In
addition to the collateral received, CFC also requires that its borrowers
set rates designed to achieve certain financial ratios.
Non-performing and Restructured Loans
CFC classifies a borrower as non-performing when any one of the following
criteria are met: (1) principal or interest payments on any loan to the
borrower are past due 90 days or more, (2) as a result of court proceedings,
repayment with the original terms is not anticipated, or (3) for some other
reason, management does not expect the timely repayment of principal or
interest. Once a borrower is classified as non-performing, interest on its
loans is recognized on a cash basis. Alternatively, CFC may choose to apply
all cash received to the reduction of principal, thereby foregoing interest
income recognition. At November 30, 1999 and May 31, 1999, $1.6 of
non-performing loans were on non-accrual status with respect to the
recognition of interest income. At November 30, 1999 and May 31, 1999,
non-performing loans totaled $29.6 and $1.6, respectively.
Loans classified as restructured are loans for which agreements have been
executed that change the original terms of the loan, generally a change to
the originally scheduled cashflows. At November 30, 1999, restructured
loans totaled $578.1, an increase of $1.4 from May 31, 1999. The increase
was due to CFC's issuances of irrevocable letters of credit for Deseret,
offset by the quarterly cashflow payments. At November 30, 1999 and May 31,
1999, all restructured loans were on accrual status with respect to the
recognition of interest income at a rate of 3.90%.
NON-PERFORMING AND RESTRUCTURED ASSETS
November 30, 1999 May 31, 1999
Non-performing loans $ 29.6 $ 1.6
Percent of loans and guarantees outstanding 0.17% 0.01%
Restructured loans $578.1 $576.7
Percent of loans and guarantees outstanding 3.41% 3.75%
Total non-performing and restructured loans $607.7 $578.3
Percent of loans and guarantees outstanding 3.58% 3.76%
24
<PAGE>
Allowance for Loan Losses
CFC maintains an allowance for potential loan losses which is periodically
reviewed by management for adequacy. In performing this assessment,
management considers various factors including an analysis of the financial
strength of CFC's borrowers, delinquencies, loan charge-off history,
underlying collateral, and economic and industry conditions.
Since its inception in 1969, CFC has charged-off loan balances in the total
amount of $78.8 net of recoveries. Management believes that the allowance
for loan losses is adequate to cover any portfolio losses which may occur.
The following chart presents a summary of the allowance for loan losses for
the six months ended November 30, 1999 and fiscal year ended May 31, 1999.
November 30, 1999 May 31, 1999
Beginning balance $212.2 $250.1
Provision for loan losses 17.4 23.9
Charge-offs, net of recoveries - (61.8)
Ending balance $229.6 $212.2
As a percentage of gross loans outstanding 1.51% 1.55%
As a percentage of gross loans and
guarantees outstanding 1.35% 1.38%
As a percentage of total non-performing and
restructured loans outstanding 37.8% 36.7%
Asset/Liability Management
A key element of CFC's funding operations is the monitoring and management
of interest rate and liquidity risk. This process involves controlling
asset and liability volumes, repricing terms and maturity schedules to
stabilize gross operating margins and retain liquidity.
Matched Funding Policy
CFC measures the matching of funds to assets by comparing the amount of
fixed rate assets repricing or amortizing to the total fixed rate debt
maturing over the remaining period until maturity of the fixed rate loan
portfolio and related funding. It is CFC's policy to manage the match
funding of asset and liability repricing terms within a range of 5% of total
assets. At November 30, 1999, CFC had $8,283 in fixed rate assets
amortizing or repricing and $7,959 in fixed rate liabilities maturing during
the next 30 years. The difference, $324, represents the fixed rate assets
in excess of the fixed rate debt maturing during the next 30 years. This
difference of $324 at November 30, 1999 represents 2.1% of total assets.
CFC funds variable rate assets which reprice monthly with short-term
liabilities, primarily commercial paper and bank bid notes, both of which
are issued primarily with original maturities under 90 days. CFC funds
fixed rate loans with fixed rate collateral trust bonds, medium-term
notes, quarterly income capital securities, members' subordinated
certificates and members' equity. With the exception of members'
subordinated certificates, which are generally issued at rates below CFC's
long-term cost of funding and with extended maturities and commercial paper,
CFC's liabilities have average maturities that closely match the repricing
terms of CFC's fixed interest rate loans. CFC also uses commercial paper
supported by interest rate exchange agreements to fund its portfolio of
fixed rate loans.
Certain of CFC's collateral trust bonds and medium-term notes were issued
with early redemption provisions. To the extent borrowers are allowed to
convert their fixed rate loans to a variable interest rate and to the extent
it is beneficial, CFC takes advantage of these early redemption privileges.
However, because conversions can take place at different intervals from
early redemptions, CFC charges conversion fees designed to compensate for
any additional interest rate risk assumed by CFC.
25
<PAGE>
CFC makes use of an interest rate analysis in the funding of its long-term
fixed rate loan portfolio. The analysis compares the scheduled fixed rate
loan amortizations and repricings against the scheduled fixed rate debt and
members' subordinated certificate amortizations to determine the fixed rate
funding gap for each individual year and the portfolio as a whole. There
are no scheduled maturities for the members' equity, primarily unretired
patronage capital allocations. The balance of members' equity is assumed to
remain relatively stable since annual retirements are approximately equal to
the annual allocation of net margins. The non-amortizing members'
subordinated certificates either mature at the time of the related loan or
guarantee or 100 years from issuance (50 years in the case of a small
portion of certificates). Accordingly, it is assumed in the funding
analysis that non-amortizing members' subordinated certificates and members'
equity are first used to "fill" any fixed rate funding gaps. The remaining
gap represents the amount of excess fixed rate funding due in that year or
the amount of fixed rate assets that are assumed funded by short-term
variable rate debt, primarily commercial paper. The interest rate
associated with the assets and debt maturing or equity and certificates is
used to calculate a TIER for each year and the portfolio as a whole. The
schedule allows CFC to analyze the impact on the overall TIER of issuing a
certain amount of debt at a fixed rate for various maturities, prior to
issuance of the debt. The following chart shows the scheduled amortization
and maturity of fixed rate assets and liabilities outstanding at November 30,
1999.
<TABLE>
<CAPTION>
INTEREST RATE GAP ANALYSIS
(Fixed Assets/Liabilities)
As of November 30, 1999
Over 1 yr. Over 3 yrs. Over 5 yrs. Over 10 yrs.
Less than but less but less but less but less Over
1 year than 3 yrs. than 5 yrs. than 10 yrs. than 20 yrs. 20 yrs. Total
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loan amortization
and repricing $ 435.0 $1,486.1 $1,423.2 $2,638.8 $1,631.2 $ 668.7 $8,283.0
Total assets $ 435.0 $1,486.1 $1,423.2 $2,638.8 $1,631.2 $ 668.7 $8,283.0
Liabilities and equity:
Long-term debt $ 60.0 $1,395.2 $1,522.8 $2,493.8 $ 682.5 $ 307.2 $6,461.5
Subordinated
certificates 3.8 32.6 35.5 115.0 712.4 376.5 1,275.8
Members' equity - - - - 221.3 - 221.3
Total liabilities
and equity $ 63.8 $1,427.8 $1,558.3 $2,608.8 $1,616.2 $ 683.7 $7,958.6
Gap * $(371.2) $ (58.3) $ 135.1 $ (30.0) $ (15.0) $ 15.0 $( 324.4)
Cumulative gap $(371.2) $ (429.5) $ (294.4) $ (324.4) $ (339.4) $(324.4)
Cumulative gap as a %
of total assets (2.41%) (2.79%) (1.91%) (2.10%) (2.20%) (2.10%)
</TABLE>
* Loan amortization/repricing over/(under) debt maturities
Derivative and Financial Instruments
At November 30, 1999 and May 31, 1999, CFC was a party to interest rate
exchange agreements totaling $3,407.7 and $2,796.0, respectively. CFC uses
interest rate exchange agreements as part of its overall interest rate
matching strategy. Interest rate exchange agreements are used when they
provide CFC a lower cost of funding option or minimize interest rate risk.
CFC will only enter interest rate exchange agreements with highly rated
financial institutions. CFC was using interest rate exchange agreements to
fix the interest rate on $2,431.3 as of November 30, 1999 and $1,996.0 as of
May 31, 1999 of its variable rate commercial paper. CFC was also using
interest rate exchange agreements at both dates to minimize the variance
between the three month LIBOR rate at which $976.4 and $750.0 of collateral
trust bonds and medium-term notes, respectively, were issued at CFC's
variable commercial paper rate. All of CFC's derivative financial
instruments were held
26
<PAGE>
for purposes other than trading. CFC has not invested in derivative
financial instruments for trading purposes in the past and does not
anticipate doing so in the future.
At November 30, 1999, CFC had three foreign-denominated medium-term notes
outstanding for 350 in Euros and 30 in British Pound Sterling. CFC has
entered into currency exchange agreements that will fix the exchange rate in
U.S. Dollars for all payments of principal and interest related to these
medium-term notes.
The following chart provides details of the related foreign-currency
exchange agreements that CFC had outstanding at November 30, 1999:
Type of U.S. Foreign
Debt (1) Issue Date Date Dollars Currency (2) Rate
MTN February 24, 1999 February 24, 2006 $390.3 350.0 EU 1.115
July 14, 1999 July 14, 2000 23.4 15.0 GBP 1.558
August 13, 1999 August 14, 2000 24.2 15.0 GBP 1.615
(1) MTN - CFC medium-term notes
(2) EU - Euros, GBP - British Pound Sterling
CFC enters into an exchange agreement to sell the amount of foreign-currency
received from the investor for U.S. Dollars on the issuance date and to buy
the amount of foreign-currency required to repay the investor principal and
interest due through or on the maturity date. By locking in the exchange
rates at the time of issuance, CFC has eliminated the possibility of any
currency gain or loss which might otherwise have been produced by the
foreign-currency borrowing. CFC includes the difference between the amount
of U.S. Dollars received at issuance and the amount of U.S. Dollars required
to purchase the foreign-currency at the interest payment dates and at
maturity as interest expense.
Market Risk
CFC's primary market risk exposure is interest rate risk. A secondary risk
exposure is liquidity risk. CFC is also exposed to counter-party risk related
to the interest rate exchange agreements it has entered.
The interest rate risk exposure is related to the funding of the fixed rate
loan portfolio. CFC does not match fund the majority of its fixed rate loans
with a specific debt issuance at the time the loan is advanced. CFC
aggregates fixed rate loans until the volume reaches a level that will allow
an economically efficient issuance of debt. CFC uses fixed rate collateral
trust bonds, medium-term notes, quarterly income capital securities, members'
subordinated certificates, members' equity and variable rate debt to fund
fixed rate loans. CFC allows borrowers flexibility in the selection of the
period for which a fixed interest rate will be in effect. Long-term loans
typically have a 15 to 35 year maturity. Borrowers may select fixed interest
rates for periods of one year through the life of the loan. To mitigate
interest rate risk related to the funding of fixed rate loans, CFC performs
a monthly gap analysis, a comparison of fixed rate assets repricing or
maturing by year to fixed rate liabilities and equity maturing by year
(see chart on page 26). The analysis will indicate the total amount of
fixed rate loans maturing by year and in aggregate that are assumed to be
funded by variable rate debt. CFC's funding objective is to limit the total
amount of fixed rate loans that are funded by variable rate debt to 3% or
less of total assets. At November 30, 1999 and May 31, 1999, fixed rate
loans funded by variable rate debt represented 2.1% and 1.4%, respectively,
of total assets.
The interest rate risk is minimal on variable rate loans, since the loans
are priced monthly based on the cost of the debt used to fund the loans.
CFC uses variable rate debt, non-interest bearing members' subordinated
certificates and members' equity to fund variable rate loans. At
November 30, 1999 and May 31, 1999, 42% and 37%, respectively, of loans
carry a variable interest rate.
CFC faces liquidity risk in the funding of its variable rate loans and in
being able to obtain the funds required to meet the loan requests of its
members or conversely, having funds to repay debt obligations when they are
due.
27
<PAGE>
CFC offers variable rate loans with maturities of up to 35 years.
These loans are funded by variable rate commercial paper, bank bid notes,
collateral trust bonds, medium-term notes, non-interest bearing members'
subordinated certificates and members' equity. The average maturity of
commercial paper and bank bid notes are typically 30 to 35 days. The
collateral trust bonds and medium-term notes are issued for longer periods
than commercial paper, but typically much shorter than the maturity of the
loans. Loan subordinated certificates are issued for the same period as the
related loan. Thus, CFC is at risk if it is unable to continually rollover
its commercial paper balances or issue other forms of variable rate debt to
support its variable rate loans. To mitigate liquidity risk, CFC maintains
back-up liquidity through revolving credit agreements with domestic and
foreign banks. At November 30, 1999 and May 31, 1999, CFC had a total of
$5,492.5 and $4,792.5 in revolving credit agreements and bank lines of
credit.
To facilitate entry into the debt markets, CFC maintains high credit ratings
on all of its debt issuances from three credit rating agencies (see chart
below). CFC also maintains shelf registrations with the SEC for its
collateral trust bonds, medium-term notes and quarterly income capital
securities. At November 30, 1999 and May 31, 1999, CFC had active shelf
registrations totaling $700 related to collateral trust bonds, $3,160 and
$144 related to medium-term notes and $100 related to quarterly income
capital securities. All of the registrations allow for issuance of the
related debt at both variable and fixed interest rates. CFC also has
commercial paper and medium-term note issuance programs in Europe. At
November 30, 1999 and May 31, 1999, CFC had $0 and $50 of commercial paper
and $685 and $735 of medium-term notes, respectively, outstanding to
European investors. As of November 30, 1999, CFC has issuance authority of
$1,000 related to commercial paper and $2,000 related to medium-term notes
under these programs.
CFC is exposed to counter-party risk related to the performance of the
parties with which it has entered into interest rate exchange agreements.
To mitigate this risk, CFC only enters into interest rate exchange
agreements with highly rated counter-parties. At November 30, 1999 and
May 31, 1999, CFC was a party to $3,407.7 and $2,796.0, respectively, of
interest rate exchange agreements. To date, CFC has not experienced a
failure of a counter-party to perform as required under the interest rate
exchange agreement. At November 30, 1999, CFC's interest rate exchange
agreement counter-parties had credit ratings ranging from A to AAA as
assigned by Standard & Poor's Corporation.
Credit Ratings
CFC's long- and short-term debt and guarantees are rated by three of the
major credit rating agencies: Moody's Investors Service, Standard & Poor's
Corporation and Fitch Investors Service. The following table presents CFC's
credit ratings at November 30, 1999.
<TABLE>
<CAPTION>
Moody's Standard & Poor's Fitch
Investors Service Corporation Investors Service
<S> <C> <C> <C>
Direct
Collateral trust bonds Aa3 AA AA
Domestic and european medium-term notes A1 AA- AA-
Quarterly income capital securities A2 A A+
Domestic and european commercial paper P1 A-1+ F-1+
Guarantees
Leveraged lease debt A1 AA- AA-
Pooled bonds Aa3 AA- AA-
Other bonds A1 AA- AA-
Short-term P1 A-1+ F-1+
</TABLE>
The ratings listed above have the meaning as defined by each of the
respective rating agencies, and they are not recommendations to buy, sell
or hold securities. In addition, they are subject to revision or withdrawal
at any time by the rating organizations.
28
<PAGE>
Member Investments
At November 30, 1999 and May 31, 1999, CFC's members provided 19.9% and
20.4% of total capitalization as follows:
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
November 30, % of May 31, % of
1999 Total (1) 1999 Total (1)
Commercial paper $1,189 18.5% $1,063 18.1%
Medium-term notes 258 5.5% 211 3.1%
Members' subordinated
certificates 1,309 100.0% 1,240 100.0%
Members' equity 274 100.0% 295 100.0%
Total $3,030 $2,809
(1) Represents the percentage of each line item outstanding to CFC members.
The total amount of member investments increased slightly at November 30,
1999, compared to May 31, 1999. Total member investments as a percentage
of total capitalization decreased due to the increase in non-member debt
required to fund the growth in loans. Total capitalization at November 30,
1999 was $15,256, an increase of $1,453 over the total capitalization of
$13,803 at May 31, 1999. When the loan loss allowance is added to both
membership contributions and total capitalization, the percentages of
membership investments to total capitalization are 21.0% and 21.6% at
November 30, 1999 and May 31, 1999, respectively. Due to recent policy
changes that have reduced members' subordinated certificate purchase
requirements and accelerated patronage capital retirements, CFC expects the
percentage of capitalization provided by its members to continue to decline.
Year 2000 Compliance
CFC did not experience any year 2000 related problems. All computer systems
were successfully restarted and are currently operating normally. There
were no problems with the buildings or building operating systems. To date,
there have been no reported problems with the disbursement or receipt of
funds. We have not received any reports of problems from any of our banks
or vendors.
In 1994, CFC began to move from a main frame computer system to a client
server system to allow for better access to data by internal staff and its
members. As a result of the decision to migrate to a client server system,
CFC's year 2000 problems were mitigated. Also, as a result of expenditures
on new client server hardware and software, CFC's year 2000 specific
expenditures were relatively minor.
CFC's borrowers did not experience any significant year 2000 related
incidents, which would have a material adverse impact on their business
operations and their ability to generate revenue to service debt obligations.
29
<PAGE>
Part II
Item 1, Legal Proceedings.
None.
Item 2, Changes in Securities.
None.
Item 3, Defaults upon Senior Securities.
None.
Item 4, Submission of Matters to a Vote of Security Holders.
None.
Item 5, Other Information.
None.
Item 6,
A. Exhibits
27 - Financial Data Schedule
B. Reports on Form 8-K.
Item 7 on October 13, 1999 - Amendment to Agency Agreement and
Calculation Agent Agreement relating to the distribution of
CFC's Medium-Term Notes, Series C, within the United States.
30
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
/s/ Steven L. Lilly
Chief Financial Officer
January 13, 2000
/s/ Steven L. Slepian
Controller (Principal Accounting Officer)
January 13, 2000
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
November 30, 1999, Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> May-31-2000
<PERIOD-END> Nov-30-1999
<CASH> 85,827
<SECURITIES> 0
<RECEIVABLES> 158,405
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,233,106
<PP&E> 53,193
<DEPRECIATION> 10,187
<TOTAL-ASSETS> 15,413,928
<CURRENT-LIABILITIES> 8,933,648
<BONDS> 4,881,076
0
0
<COMMON> 0
<OTHER-SE> 1,583,088
<TOTAL-LIABILITY-AND-EQUITY> 15,413,928
<SALES> 469,255
<TOTAL-REVENUES> 469,255
<CGS> 396,001
<TOTAL-COSTS> 396,001
<OTHER-EXPENSES> 11,161
<LOSS-PROVISION> 17,355
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 45,579
<INCOME-TAX> 0
<INCOME-CONTINUING> 45,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,579
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
