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 February 29, 2000
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
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
( Unaudited)
February 29, 2000 May 31, 1999
CASH AND CASH EQUIVALENTS $ 104,956 $ 74,403
DEBT SERVICE INVESTMENTS 26,382 22,969
LOANS TO MEMBERS, NET 15,582,238 13,491,199
RECEIVABLES 172,346 161,523
FIXED ASSETS, NET 42,689 38,683
DEBT SERVICE RESERVE FUNDS 98,870 98,870
OTHER ASSETS 41,139 37,605
TOTAL ASSETS $16,068,620 $13,925,252
The accompanying notes are an integral part of these
combined financial statements.
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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)
February 29, 2000 May 31, 1999
NOTES PAYABLE, due within one year $ 6,601,707 $ 4,976,706
ACCOUNTS PAYABLE 16,065 16,707
ACCRUED INTEREST PAYABLE 126,051 95,741
LONG-TERM DEBT 7,312,453 6,891,122
OTHER LIABILITIES 3,115 10,207
QUARTERLY INCOME CAPITAL SECURITIES 400,000 400,000
MEMBERS' SUBORDINATED CERTIFICATES:
Membership subordinated certificates 641,985 641,937
Loan & guarantee subordinated certificates 657,116 597,879
Total members' subordinated certificates 1,299,101 1,239,816
MEMBERS' EQUITY 310,128 294,953
Total members' subordinated
certificates & members' equity 1,609,229 1,534,769
TOTAL LIABILITIES AND MEMBERS' EQUITY $16,068,620 $13,925,252
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 INCOME, EXPENSES AND NET MARGINS
(Dollar Amounts in Thousands)
For the Quarters and Nine Months Ended February 29, 2000 and February 28, 1999
Quarters Ended Nine Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING INCOME-Interest
on loans to members $265,582 $200,098 $734,837 $572,479
Less: Cost of funds 224,145 172,833 620,146 483,200
Gross operating margin 41,437 27,265 114,691 89,279
EXPENSES:
General, administrative
and loan processing 6,072 6,525 17,233 18,118
Provision for loan losses - - 17,355 15,780
Total expenses 6,072 6,525 34,588 33,898
Operating margin 35,365 20,740 80,103 55,381
NON-OPERATING INCOME 263 251 1,104 1,333
NET MARGINS $ 35,628 $ 20,991 $ 81,207 $ 56,714
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
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<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Quarters Ended February 29, 2000 and February 28, 1999
Patronage Capital
Allocated
Unal- General
Education located Reserve
Total Memberships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Quarter ended February 29, 2000
Balance at November 30, 1999 $274,538 $1,530 $438 $47,868 $503 $224,199
Net margins 35,628 - - 35,628 - -
Other (38) 6 (42) - - (2)
Balance at February 29, 2000 $310,128 $1,536 $396 $83,496 $503 $224,197
Quarter ended February 28, 1999
Balance at November 30, 1998 $257,754 $1,516 $428 $38,012 $500 $217,298
Net margins 20,991 - - 20,991 - -
Other (9) 2 (20) - - 9
Balance at February 28, 1999 $278,736 $1,518 $408 $59,003 $500 $217,307
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
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<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Nine Months Ended February 29, 2000 and February 28, 1999
Patronage Capital
Allocated
Unal- General
Education located Reserve
Total Memberships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Nine Months ended February 29, 2000
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 81,207 - - 81,207 - -
Other 413 1 (147) - - 559
Balance at February 29, 2000 $310,128 $1,536 $ 396 $83,496 $503 $224,197
Nine Months ended February 28, 1999
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 56,714 - - 56,714 - -
Other 345 27 (268) - - 586
Balance at February 28, 1999 $278,736 $1,518 $ 408 $59,003 $500 $217,307
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
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<PAGE>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Nine Months Ended February 29, 2000 and February 28, 1999
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margins $ 81,207 $ 56,714
Add (deduct):
Provision for loan losses 17,355 15,780
Depreciation 1,183 1,098
Amortization of deferred income (1,752) (3,819)
Amortization of issuance
costs and deferred charges 4,141 2,757
Receivables (8,442) (24,697)
Accounts payable (642) 32,862
Accrued interest payable 30,310 40,860
Other (23,520) (23,264)
Net cash flows provided by
operating activities 99,840 98,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans (5,506,571) (8,497,331)
Principal collected on loans 3,398,177 5,749,008
Investments in fixed assets (5,189) (8,944)
Net cash flows used in
investing activities (2,113,583) (2,757,267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable, net (167,551) (88,462)
Debt service investments, net (3,413) (3,414)
Proceeds from issuance of
long-term debt 3,321,480 2,961,765
Payments for retirement of
long-term debt (1,107,391) (351,197)
Proceeds from issuance of quarterly
income capital securities - 200,000
Proceeds from issuance of members'
subordinated certificates 83,777 54,975
Payments for retirement of members'
subordinated certificates (26,872) (52,885)
Payments for retirement of
patronage capital (55,734) (50,985)
Net cash flows provided by
financing activities 2,044,296 2,669,797
NET INCREASE IN CASH & CASH EQUIVALENTS 30,553 10,821
BEGINNING CASH AND CASH EQUIVALENTS 74,403 65,274
ENDING CASH AND CASH EQUIVALENTS $ 104,956 $ 76,095
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during nine
months for interest $ 594,931 $ 445,772
The accompanying notes are an integral part of these
combined financial statements.
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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 that 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 1,051 members as of February 29, 2000, included 904 rural electric
utility system members, virtually all of which are consumer-owned
cooperatives, 75 service members and 72 associate members. The utility
member systems included 834 distribution systems and 70 generation and
transmission systems operating in 49 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
1997. 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 February 29, 2000, RTFC had
536 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 February 29, 2000. 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 February 29, 2000 (unaudited) and May
31, 1999, and the combined results of operations, cash flows and changes
in members' equity for the nine months ended February 29, 2000 and February
28, 1999 (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.
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.
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(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 February 29,
2000, 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
$4,503.5 million and $3,809.6 million as of February 29, 2000 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 February 29, At May 31,
(Dollar amounts in thousands) 2000 1999
Outstanding loans to
members and their affiliates $3,371,571 $2,710,339
Total assets 3,614,610 2,893,810
Notes payable to CFC 3,351,207 2,693,675
Total liabilities 3,396,385 2,729,102
Members' equity and subordinated certificates 218,225 164,708
(Unaudited)
For the Nine Months Ended
February 29, February 28,
(Dollar amounts in thousands) 2000 1999
Operating income $ 170,069 $ 105,305
Net margin 2,592 2,761
Summary financial information relating to GFC is presented below:
(Unaudited)
At February 29, At May 31,
(Dollar amounts in thousands) 2000 1999
Outstanding loans to members $ 45,855 $ 130,940
Total assets 47,549 133,091
Notes payable to CFC 45,855 130,940
Total liabilities 47,033 132,861
Members' equity 516 230
(Unaudited)
For the Nine Months Ended
February 29, February 28,
(Dollar amounts in thousands) 2000 1999
Operating income $ 5,537 $ 5,898
Net margin 509 546
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC
on a combined basis.
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(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 was 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 U.S. 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 February 29, 2000 and May 31, 1999, mortgage notes representing
approximately $3,516.1 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 February 29, 2000 and May 31, 1999
were $3,371.0 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 nine
months ended February 29, 2000 and the year ended May 31, 1999.
February 29, May 31,
(Dollar amounts in thousands) 2000 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
Loan loss allowance as a percentage of:
Total loans 1.45% 1.55%
Total loans and guarantees 1.31% 1.38%
Total non-performing and restructured loans 37.94% 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
at the same time as the loan or guarantee 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 February 29, 2000, 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
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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.
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 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 February 29, 2000 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 February
29, 2000 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 February 29, 2000 and May 31, 1999, CFC had unadvanced loan
commitments, summarized by type of loan, as follows:
(Dollar amounts in thousands) February 29, 2000 May 31, 1999
Long-term $ 7,308,855 $ 7,004,692
Intermediate-term 340,695 299,659
Short-term 4,590,405 4,392,012
Telecommunications 1,131,929 1,111,741
Total unadvanced loan commitments $13,371,884 $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 retired $12.5 million in January 2000,
representing 70% of their fiscal year 1999 allocation. 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 February 29, 2000 and May 31, 1999, CFC had guaranteed the
following contractual obligations of its members:
(Dollar amounts in thousands) February 29, 2000 May 31, 1999
Long-term tax-exempt bonds (A) $1,030,370 $1,062,185
Debt portions of leveraged
lease transactions (B) 112,043 174,961
Indemnifications of tax
benefit transfers (C) 262,276 285,169
Other guarantees (D) 296,743 162,150
Total guarantees $1,701,432 $1,684,465
(A) CFC has unconditionally guaranteed to the holders or to the 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, $925.0 million and $947.3 million
as of February 29, 2000 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 the remarketing agents do not
sell such bonds to other purchasers.
(B) CFC has unconditionally guaranteed the repayment of debt raised by
National Cooperative Services Corporation("NCSC") for leveraged lease
transactions.
(C) CFC has unconditionally guaranteed to lessors certain indemnity
payments that 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 February 29, 2000 and May 31, 1999, CFC had unconditionally
guaranteed commercial paper, along with a related interest rate exchange
agreement, issued by NCSC of $158.8 million and $63.7 million, respectively.
(10) Derivative Financial Instruments
At February 29, 2000 and May 31, 1999, CFC was a party to interest rate
exchange agreements with notional amounts totaling $4,378.0 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 February
29, 2000 and May 31, 1999, CFC was using interest rate exchange agreements
to fix the interest rate on $2,126.6 million and $1,996.0 million,
respectively, of its variable rate commercial paper. Interest rate exchange
agreements were used to swap fixed interest rates with variable interest
rates on $525.0 million of collateral trust bonds as of February 29, 2000
and $50.0 million of medium-term notes as of May 31, 1999. 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 $1,726.4 million and $750.0 million at February 29,
2000 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.
13
<PAGE>
The following table lists the notional principal amounts of CFC's interest
rate exchange agreements at February 29, 2000 and May 31, 1999:
<TABLE>
<CAPTION>
Notional Principal Amount Notional Principal Amount
Maturity Date February 29, May 31, Maturity Date February 29, May 31,
2000 1999 2000 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 August 2003 (3) 50,000 50,000
September 1999 (2) - 75,000 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
November 1999 (2) - 50,000 September 2003 (3) 28,000 28,000
November 1999 (2) - 50,000 September 2003 (3) 28,785 28,785
November 1999 (2) - 50,000 October 2003 (3) 22,991 32,533
November 1999 (2) - 75,000 October 2003 (3) 22,991 32,533
November 1999 (2) - 75,000 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
January 2000 (3) - 52,851 October 2004 (3) 62,500 -
June 2000 (2) 250,000 - October 2004 (3) 62,500 -
June 2000 (2) 200,000 - November 2004 (3) 61,000 61,000
June 2000 (2) 150,000 - November 2004 (3) 61,000 61,000
June 2000 (2) 75,000 - January 2005 (3) 8,000 8,000
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 - April 2006 (3) 25,000 25,000
July 2000 (2) 100,000 - April 2006 (3) 25,000 25,000
July 2000 (2) 25,000 - January 2008 (3) 14,000 14,000
August 2000 (3) 110,000 110,000 July 2008 (3) 40,400 40,400
August 2000 (3) 110,000 110,000 September 2008 (3) 26,235 26,235
September 2000 (3) 6,140 7,450 September 2008 (3) 9,895 10,425
September 2000 (3) 4,270 13,355 September 2008 (3) 9,680 10,300
September 2000 (2) 50,000 - September 2008 (3) 20,600 20,600
September 2000 (2) 200,000 - October 2008 (3) 33,512 33,512
October 2000 (3) 20,000 20,000 April 2009 (3) 33,000 33,000
January 2001 (3) 42,749 42,749 September 2010 (3) 43,000 -
January 2001 (3) 23,000 23,000 January 2012 (3) 13,000 13,000
January 2001 (2) 250,000 - February 2012 (3) 9,500 10,000
January 2001 (2) 250,000 - 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) 43,300 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
February 2003 (1) 250,000 - September 2028 (3) 59,220 60,000
February 2003 (1) 275,000 - April 2029 (3) 66,000 66,000
June 2003 (3) 48,000 48,000 September 2030 (3) 43,000 -
$4,378,040 $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 nine months ended February 29, 2000, CFC 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 February 29, 2000:
(Dollar amounts in thousands)
Type of Maturity U.S. Foreign
Debt (1) Issue Date 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 February 29, 2000 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 $575.4 million and $576.7 million, respectively. At both dates,
$1.6 million of non-performing loans 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. CFC accrued $0.9 million and $16.9 million of interest
income on non-performing and restructured loans, respectively, totaling
$17.8 million for the nine months ended February 29, 2000. CFC accrued a
total of $1.9 million of interest income on non-performing and restructured
loans during the nine months ended February 28, 1999. Subsequent to the
end of the quarter, CFC received the payment required to bring $28.0
million of non-performing loans current. In addition, CFC is planning to
write-off the remaining $1.6 million of non-performing loans in April 2000 .
(b) CFC classified $577.0 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 February 29, 2000 and May 31, 1999,
respectively. CFC had allocated $91.0 million and $101.0 million of the
loan loss allowance for such impaired loans at February 29, 2000 and
May 31, 1999, respectively. The amount of loan loss allowance allocated
for such
15
<PAGE>
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 $16.9 million on loans classified
as impaired during the nine months ended February 29, 2000. The
average recorded investment in impaired loans for the nine months ended
February 29, 2000 was $578.7 million compared to $460.1 million for the
year ended May 31, 1999.
(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' purchases 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, the city of Riverside and CFC reached an
agreement with respect to the settlement of the Riverside Federal
Energy Regulatory Commission ("FERC"). The FERC approved the
settlement effective as of July 28, 1999. 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.
16
<PAGE>
Deseret and Riverside also commenced related proceedings in the
Federal courts in California and Utah. The parties have submitted to
the United States District Court, District of Utah, a notice of approval
by FERC of settlement between Deseret and Riverside and stipulated form
of order dismissing action.
On March 24, 1998, the City of Anaheim, California ("Anaheim") commenced
an action against Deseret that was consolidated with the Riverside
Federal court proceeding. Anaheim also filed a complaint with the FERC.
In January 1999, 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.
The FERC approved the settlement effective as of February 1, 1999 and
all related federal court proceedings have been dismissed.
As of February 29, 2000 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 February 29, 2000 and May 31, 1999, CFC had the following exposure to
Deseret:
(Dollar amounts in millions) February 29, 2000 May 31, 1999
Loans outstanding (1) $575.4 $576.7
Guarantees outstanding:
Tax benefit transfers 2.3 3.2
Equipment leases 47.5 51.6
Other (2) 40.2 12.6
Total guarantees 90.0 67.4
Total exposure $665.4 $644.1
(1) As of February 29, 2000, the loan balance of $575.4 million to
Deseret is comprised of $181.4 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, $100.0 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 include irrevocable letters of credit and a
guarantee of certain operations and maintenance expenses.
Deseret has made all payments required by the ORA. CFC received minimum
cashflow payments totaling $30.4 million and excess cash payments totaling
$10.3 million for calendar year 1999. On March 31, 2000, Deseret made the
first quarterly payment for calendar year 2000, in the amount of $8.5
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 February 29, 2000, two other borrowers were in payment default to
CFC on secured loans totaling $29.6 million. Subsequent to the end of the
quarter, CFC received a payment from one of the borrowers required to bring
$28.0 million of these secured non-performing loans current. In addition,
CFC is planning to write-off the remaining $1.6 million of non-performing
loans in April 2000. At May 31, 1999, there was one borrower in payment
default to CFC on secured loans totaling $1.6 million.
(12) Loans Guaranteed by RUS
At February 29, 2000 and May 31, 1999, CFC held $45.9 and $130.9 million,
respectively, 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
February 29, 2000, CFC had $38.3 million of loans outstanding under this
program.
17
<PAGE>
(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.
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 nine months ended
February 29, 2000 and the total assets at February 29, 2000.
(Dollar amounts in thousands)
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 564,768 $ 170,069 $ 734,837
Cost of funds 452,988 167,158 620,146
Gross margin 111,780 2,911 114,691
Operating expenses 16,876 357 17,233
Loan loss provision 17,355 - 17,355
Total expenses 34,231 357 34,588
Operating Margin 77,549 2,554 80,103
Other income 1,066 38 1,104
Net margin $ 78,615 $ 2,592 $ 81,207
Assets:
Loans outstanding, net (1) $12,210,667 $3,371,571 $15,582,238
Other assets 243,343 243,039 486,382
Total assets $12,454,010 $3,614,610 $16,068,620
(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 nine months ended
February 28, 1999 and the total assets at February 28, 1999.
(Dollar amounts in thousands)
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 467,174 $ 105,305 $ 572,479
Cost of funds 380,864 102,336 483,200
Gross margin 86,310 2,969 89,279
Operating expenses 17,886 232 18,118
Loan loss provision 15,780 - 15,780
Total expenses 33,666 232 33,898
Operating Margin 52,644 2,737 55,381
Other income 1,309 24 1,333
Net margin $ 53,953 $ 2,761 $ 56,714
Assets:
Loans outstanding, net (1) $10,496,906 $2,564,982 $13,061,888
Other assets 244,824 184,316 429,140
Total assets $10,741,730 $2,749,298 $13,491,028
(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 February 29, 2000, CFC had $16,069 in total assets, an increase of
$2,143 or 15.4% over May 31, 1999. Net loans outstanding to members
totaled $15,582 at February 29, 2000 an increase of $2,091 compared to a
total of $13,491 at May 31, 1999. Net loans represented 97.0% and 96.9%
of total assets at February 29, 2000 and May 31, 1999, respectively. The
remaining assets, $487 and $434 at February 29, 2000 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:
Increase/
February 29, 2000 May 31, 1999 Decrease
Long-term loans:
Electric $10,276.1 $ 9,132.7 $1,143.4
Telephone 2,884.8 2,354.8 530.0
Total long-term loans 13,160.9 11,487.5 1,673.4
Intermediate-term loans:
Electric 271.5 301.1 (29.6)
Telephone 13.7 13.5 0.2
Total intermediate-term loans 285.2 314.6 (29.4)
Short-term loans:
Electric 1,231.5 850.0 381.5
Telephone 445.0 342.1 102.9
Total short-term loans 1,676.5 1,192.1 484.4
RUS guaranteed loans 84.2 130.9 (46.7)
Non-performing loans 29.6 1.6 28.0
Restructured loans 575.4 576.7 (1.3)
Total loans 15,811.8 13,703.4 2,108.4
Loan loss allowance 229.6 212.2 17.4
Net loans $15,582.2 $13,491.2 $2,091.0
Percentage of loans with a
fixed interest rate 54% 63%
Percentage of loans with a
variable interest rate 46% 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
19
<PAGE>
financing; (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 February
29, 2000 and May 31, 1999, respectively. Long-term fixed rate loans
represented 54% and 63% of the total loans at February 29, 2000 and May
31, 1999, respectively. Loans converting from a variable rate to a fixed
rate for the nine months ended February 29, 2000 totaled $14, a decrease
from the $1,610 that converted for the nine months ended February 28,
1999. Offsetting the conversions to the fixed rate were $6 and $53 of
loans that converted from the fixed rate to the variable for the nine
months ended February 29, 2000 and February 28, 1999, respectively. This
resulted in a net conversion of $8 from the variable rate to a fixed rate
for the nine months ended February 29, 2000 compared to a net conversion
of $1,557 for the year ended February 28, 1999.
Guarantees outstanding:
February 29, May 31, Increase/
2000 1999 Decrease
Tax-exempt bonds $1,030.4 $1,062.2 $(31.8)
Lease transactions 112.0 175.0 (63.0)
Indemnifications of
tax benefit transfers 262.3 285.2 (22.9)
Other guarantees 296.7 162.1 134.6
Total $1,701.4 $1,684.5 $ 16.9
The increase in guarantees outstanding for the nine months ended February
29, 2000, 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. This increase is offset by regularly scheduled
payments on tax-exempt pollution control bonds, leverage leases and a
reduction to the amounts guaranteed under safe harbor leases.
Total credit committed at:
February 29, May 31,
2000 1999 Increase
Loans $15,811.8 $13,703.4 $2,108.4
Unadvanced commitments 13,371.9 12,808.1 563.8
Guarantees 1,701.4 1,684.5 16.9
Total $30,885.1 $28,196.0 $2,689.1
At February 29, 2000, CFC had unadvanced commitments totaling $13,372, an
increase of $564 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 39% of the
outstanding commitments at February 29, 2000 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 nine months ended
February 29, 2000, 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 February 29, 2000, total credit commitments outstanding represented
an increase of 10% over the total at May 31, 1999.
20
<PAGE>
Debt outstanding at:
February 29, May 31, Increase/
2000 1999 (Decrease)
Notes payable:
Commercial paper $ 5,943.7 $ 5,871.2 $ 72.5
Bank bid notes 135.0 375.0 (240.0)
Long-term debt 2,925.5 1,133.0 1,792.5
Commercial paper reclassified as L/T (2,402.5) (2,402.5) -
Total notes payable 6,601.7 4,976.7 1,625.0
Long-term debt:
Collateral trust bonds 3,371.0 2,846.3 524.7
Medium-term notes 1,539.0 1,642.3 (103.3)
Commercial paper reclassified as L/T 2,402.5 2,402.5 -
Total long-term debt 7,312.5 6,891.1 421.4
QUICS 400.0 400.0 -
Total debt outstanding $14,314.2 $12,267.8 $2,046.4
Percentage of short-term debt 46% 41%
Percentage of long-term debt 54% 59%
Percentage of fixed rate debt (1) 54% 58%
Percentage of variable rate debt (2) 46% 42%
(1)Includes fixed rate collateral trust bonds, medium-term notes and QUICS
plus commercial paper with rates fixed through interest rate exchange
agreements and less any fixed rate debt that has been swapped to variable.
(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 $16,069 at February 29, 2000.
This is an increase of $2,144 or 15.4% over the balance of $13,925 at
May 31, 1999. The increase to total liabilities and members' equity for
the nine months ended February 29, 2000 was primarily due to increases in
short-term debt required to fund the increase in loans outstanding. Total
debt outstanding at February 29, 2000 was $14,314 an increase of $2,046 over
the May 31, 1999 balance of $12,268.
Members' subordinated certificates and members' equity outstanding at:
February 29, May 31, Increase/
2000 1999 (Decrease)
Subordinated certificates:
Membership certificates $ 642.0 $ 641.9 $ 0.1
Loan certificates 483.8 422.8 61.0
Guarantee certificates 173.3 175.1 (1.8)
Total certificates 1,299.1 1,239.8 59.3
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 83.5 2.3 81.2
Total equity 310.1 295.0 15.1
Total equity and certificates $1,609.2 $1,534.8 $ 74.4
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 has 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. 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 increase to members' subordinated certificates and equity for the nine
months ended February 29, 2000 is due to the issuance of new loan
certificates related to loan advances and current year net margins
offset by the redemption of certificates related to guarantees and the
retirement of patronage capital.
CFC's leverage ratio increased to 7.80 during the nine months ended
February 29, 2000, 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 to 6.24 at February 29, 2000 from
5.52 at May 31, 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 1.13 and 1.12 for the nine
months ended February 29, 2000 and February 28, 1999, respectively. TIER
is a measure of CFC's ability to cover the interest expense on funding.
Results for nine months ended February 29, 2000 versus February 28, 1999
Net margins for the nine months ended February 29, 2000, were $81.2, an
increase of $24.5 over the $56.7 earned the prior year.
Net margins for the nine months ended:
February 29, February 28, Increase/
2000 1999 (Decrease)
Interest income $734.8 $572.5 $162.3
Cost of funds 620.1 483.2 136.9
Gross margin 114.7 89.3 25.4
General & administrative expenses 17.2 18.1 (0.9)
Loan loss provision 17.4 15.8 1.6
Total expenses 34.6 33.9 0.7
Operating margin 80.1 55.4 24.7
Non-operating income 1.1 1.3 (0.2)
Net margin $ 81.2 $ 56.7 $ 24.5
TIER 1.13 1.12
22
<PAGE>
Net margins expressed as a percentage of average loans outstanding for the
nine months ended:
Increase/
February 29, 2000 February 28, 1999 (Decrease)
Interest income 6.61% 6.53% 0.08%
Cost of funds 5.58% 5.51% 0.07%
Gross margin 1.03% 1.02% 0.01%
General &
administrative expenses 0.15% 0.21% (0.06)%
Loan loss provision 0.16% 0.18% (0.02)%
Total expenses 0.31% 0.39% (0.08)%
Operating margin 0.72% 0.63% 0.09%
Non-operating income 0.01% 0.01% -
Net margin 0.73% 0.64% 0.09%
Average loan volume for the nine months ended February 29, 2000 totaled
$14,803. This is an increase of $3,084 or 26% over the average loan balance
of $11,719 for the prior year period. The increase to net margins for the
nine month period ended February 29, 2000 was due to the increase in loan
volume. The average yield earned on the loan portfolio increased for the
nine months ended February 29, 2000 as did the average cost of funds.
These increases were due to increases in interest rates in the capital
markets. CFC sets the interest rates on its loans to cover the cost of
funds, general and administrative expenses, a provision for loan losses
and a reasonable TIER. As a result, the yield earned on the loan portfolio
will move in conjunction with the rates in the capital markets. The total
dollar amount of operating expenses decreased slightly for the nine months
ended February 29, 2000. When presented as a percentage of average loan
volume, operating expenses decreased by 6 basis points or 29% for the nine
months ended February 29, 2000.
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 February 29, 2000 and May 31, 1999.
February 29, 2000 May 31, 1999
Amount % of Amount %
Outstanding Total Outstanding of Total
Electric systems:
Distribution $10,061.3 57.5% $ 8,719.3 56.7%
Power supply 3,527.2 20.1% 3,538.8 23.0%
Service organizations 442.7 2.5% 315.9 2.0%
Associate members 110.4 0.6% 103.6 0.7%
Subtotal electric systems 14,141.6 80.7% 12,677.6 82.4%
Telecommunication systems 3,371.6 19.3% 2,710.3 17.6%
Total $17,513.2 100.0% $15,387.9 100.0%
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. At February 29, 2000, the total exposure
outstanding to any one borrower (excluding loans guaranteed by RUS) did not
exceed 3.8% of total loans and guarantees outstanding. At February 29, 2000
and May 31, 1999, CFC had $2,939 and $2,242, respectively, in loans
outstanding, excluding loans guaranteed by RUS to its largest 10 borrowers.
At the same dates, CFC had $663 and $703, respectively, in guarantees
outstanding to its largest 10 borrowers. The amounts outstanding
23
<PAGE>
to the largest 10 borrowers at February 29, 2000 and May 31, 1999,
represented 19% and 16%, respectively, of total loans outstanding and
39% and 42%, respectively, of total guarantees outstanding. Total
credit exposure to the largest 10 borrowers at February 29, 2000 and May 31,
1999 represented 21% and 19%, respectively, of total credit exposure.
At February 29, 2000, 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 February 29, 2000, $1,561 of loans were
unsecured representing 9.9% of total loans and 8.9% of total loans and
guarantees. At May 31, 1999, $1,231 of loans were unsecured representing
9.1% of total loans and 8.1% of total loans and guarantees. As of February
29, 2000 and May 31, 1999, approximately $46 or 2.9% 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 February 29, 2000 and May 31, 1999, the
unsecured loans would represent 9.6% and 7.8% of total loans and 8.7% 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 or accrual basis, to be determined
on a case by case basis. Alternatively, CFC may choose to apply all cash
received to the reduction of principal, thereby foregoing interest income
recognition. At February 29, 2000 and May 31, 1999, $1.6 of non-performing
loans were on non-accrual status with respect to the recognition of interest
income. At February 29, 2000 and May 31, 1999, non-performing loans totaled
$29.6 and $1.6, respectively. Subsequent to the end of the quarter, CFC
received the payment required to bring $28.0 of non-performing loans
current. In addition, in CFC is planning to write-off the remaining
$1.6 million of non-performing loans April 2000.
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 February 29, 2000, restructured
loans totaled $575.4, a decrease of $1.3 from May 31, 1999. The decrease
was due to quarterly cashflow payments. At February 29, 2000 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
February 29, 2000 May 31, 1999
Non-performing loans $ 29.6 $ 1.6
Percent of loans and guarantees outstanding 0.17% 0.01%
Restructured loans $575.4 $576.7
Percent of loans and guarantees outstanding 3.29% 3.75%
Total non-performing and restructured loans $605.0 $578.3
Percent of loans and guarantees outstanding 3.46% 3.76%
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
24
<PAGE>
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 that may occur.
The following chart presents a summary of the allowance for loan losses for
the nine months ended February 29, 2000 and fiscal year ended May 31, 1999.
February 29, 2000 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 1.45% 1.55%
As a percentage of gross
loans and guarantees outstanding 1.31% 1.38%
As a percentage of total non-performing
and restructured loans outstanding 37.94% 36.69%
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 February 29, 2000, CFC had $7,984.8 in fixed rate assets
amortizing or repricing funding $7,679.0 in fixed rate liabilities maturing
during the next 30 years and CFC had $256.8 in members' equity that does
not have a scheduled maturity. The difference, $49.0 or 0.3% of total
assets, represents the fixed rate assets in excess of the fixed rate debt
maturing during the next 30 years. 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.
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
25
<PAGE>
members' subordinated certificates either matures 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 February
29, 2000.
[CAPTION]
<TABLE>
INTEREST RATE GAP ANALYSIS
(Fixed Assets/Liabilities)
As of February 29, 2000
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>
Loan amortization
and repricing $ 68.0 $1,553.8 $1,454.5 $2,687.0 $1,631.3 $590.2 $7,984.8
Total assets $ 68.0 $1,553.8 $1,454.5 $2,687.0 $1,631.3 $590.2 $7,984.8
Liabilities and equity:
Long-term debt $ 4.8 $1,427.6 $1,529.4 $2,493.9 $ 682.5 $664.6 $6,802.8
Subordinated certificates 1.0 26.9 29.9 200.9 610.6 6.9 876.2
Members' equity - - - - 256.8 - 256.8
Total liabilities and equity $ 5.8 $1,454.5 $1,559.3 $2,694.8 $1,549.9 $671.5 $7,935.8
Gap * $ (62.2) $ (99.3) $ 104.8 $ 7.8 $ (81.4) $ 81.3 $ (49.0)
Cumulative gap $ (62.2) $ (161.5) $ (56.7) $ (48.9) $ (130.3) $(49.0)
Cumulative gap as a %
of total assets (0.4)% (1.0)% (0.4)% (0.3)% (0.8)% (0.3)%
</TABLE>
* Loan amortization/repricing over/(under) debt maturities
Derivative and Financial Instruments
At February 29, 2000 and May 31, 1999, CFC was a party to interest rate
exchange agreements totaling $4,378.0 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 $2,126.6 as of February 29, 2000 and $1,996.0
as of May 31, 1999 of its variable rate commercial paper. Interest rate
exchange agreements were used to swap fixed interest rates with variable
interest rates on $525.0 of collateral trust bonds as of February 29, 2000
and $50.0 of medium-term notes as of May 31, 1999. CFC was also using
interest rate exchange agreements at both dates to minimize the variance
between the three month LIBOR rate at which $1,726.4 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 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.
26
<PAGE>
At February 29, 2000, 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 February 29, 2000:
Type of Maturity U.S. Foreign Rate
Debt (1) Issue Date Date Dollars Currency (2)
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 that 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 February 29, 2000
and May 31, 1999, fixed rate loans funded by variable rate debt
represented 0.3% 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 February 29, 2000 and May 31, 1999, 46% 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. 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
27
<PAGE>
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 February 29, 2000 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, quarterly income
capital securities and member subordinated capital securities. At
February 29, 2000 and May 31, 1999, CFC had active shelf registrations
totaling $175 and $700 related to collateral trust bonds, $2,623 and $144
related to medium-term notes and $400 and $100 related to quarterly income
capital securities and member subordinated 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 February 29, 2000 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 February 29, 2000,
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 February 29, 2000 and
May 31, 1999, CFC was a party to $4,378 and $2,796, 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 February 29, 2000, 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 February 29, 2000.
Moody's Standard & Poor's Fitch
Investors Service Corporation Investors Service
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+
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 February 29, 2000 and May 31, 1999, CFC's members provided 18.1% and
20.4% of total capitalization as follows:
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
February 29, % May 31, %
2000 of Total (1) 1999 of Total (1)
Commercial paper $1,001 16.9% $1,063 18.1%
Medium-term notes 266 6.0% 211 3.1%
Members' subordinated
certificates 1,299 100.0% 1,240 100.0%
Members' equity 310 100.0% 295 100.0%
Total $2,876 $2,809
(1) Represents the percentage of each line item outstanding to CFC members.
The total amount of member investments increased slightly at February 29,
2000 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 February 29,
2000 was $15,923, an increase of $2,120 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 19.2% and 21.6% at
February 29, 2000 and May 31, 1999, respectively.
Year 2000 Compliance
To date, CFC has not experienced 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.
To date, CFC's borrowers have not experienced 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 February 10, 2000 - Filing of Underwriting Agreement
for 7.375% Collateral Trust Bonds, due 2003.
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
April 14, 2000
/s/ Steven L. Slepian
Controller (Principal Accounting Officer)
April 14, 2000
31
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
February 29, 2000, Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> FEB-29-2000
<CASH> 104,956
<SECURITIES> 0
<RECEIVABLES> 172,346
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,885,922
<PP&E> 53,313
<DEPRECIATION> 10,624
<TOTAL-ASSETS> 16,068,620
<CURRENT-LIABILITIES> 9,146,323
<BONDS> 5,309,953
0
0
<COMMON> 0
<OTHER-SE> 1,609,229
<TOTAL-LIABILITY-AND-EQUITY> 16,068,620
<SALES> 734,837
<TOTAL-REVENUES> 734,837
<CGS> 620,146
<TOTAL-COSTS> 620,146
<OTHER-EXPENSES> 17,233
<LOSS-PROVISION> 17,355
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 81,207
<INCOME-TAX> 0
<INCOME-CONTINUING> 81,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,207
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
