Farm Credit Watch: ABA Protests to FCA about Illegal CoBank Loan

By Bert Ely

On December 1, the American Bankers Association sent a letter to Farm Credit Administration chairman Dallas Tonsager registering its strong objection to CoBank’s participation in a $1.55 billion credit facility recently extended to CyrusOne LP, the operating partnership of CyrusOne, Inc., a NASDAQ-listed real estate investment trust.

CoBank’s portion of the loan participation was not disclosed, but could easily fall in the $50-$100 million range. CyrusOne is in the business of leasing buildings used to house computer data centers to a variety of businesses. It is highly unlikely that any of CyrusOne’s lessees is engaged in agriculture.

All of CyrusOne’s 35 data centers are located in major metropolitan areas, so there is absolutely nothing rural about its activities. Worse, there is no way CoBank can cite lending to a “similar entity” to justify buying this loan participation, a justification it cited in buying participations in loans to Verizon, AT&T, and other investor-owned utilities that compete against cooperatively-owned rural utilities that CoBank can and does lend to.

Further, since REITs already enjoy substantial tax advantages, they are hardly in need of taxpayer-subsidized financing. To date, the FCA has not responded to ABA’s letter.

Yet another CoBank loan to an ineligible FCS borrower
According to a November 15 BusinessWire article, CoBank participated in a $434 million “tax equity investment and construction/term loan” to sPower, “the largest private owner in the United States of utility-scale solar operating assets.”

sPower, in turn, “is a portfolio company of Fir Tree Partners, a global investment fund” that “is a privately owned hedge fund sponsor. The firm primarily provides its services to pooled investment vehicles. It invests in the public equity markets and real estate investments in commercial and residential real estate.” There is absolutely no indication that sPower or Fir Tree Partners are involved in agriculture.

The three solar projects financed by this loan also are not related to agriculture, for the electricity produced by the projects will be sold exclusively to the City of Los Angeles’ Department of Water and Power under 25-year Power Purchase Agreements. The LADWP, of course, serves the highly urbanized City of Los Angeles, hardly a rural area. The fact that the solar projects are located in an unincorporated, rural area in Kern County, California, hardly qualifies this project for taxpayer-subsidized financing, especially since its ultimate owner, Fir Tree Partners, is a “privately owned hedge fund sponsor” that “invests worldwide.” It is quite puzzling that CoBank continues to lend to businesses it is not authorized to lend to despite the sharp questioning of such lending by members of the Senate and House Agriculture Committees during the recent FCS and FCA oversight hearings the two committees held.

How Dallas Tonsager became the new FCA chairman and CEO
As last month’s FCW reported, on November 22, President Obama “designated” FCA board member Dallas Tonsager as the FCA’s new chairman and CEO. He succeeded Kenneth Spearman, who had been FCA chairman and CEO since March 2015. Although Spearman’s term as an FCA board member expired last May, he can continue to serve on the FCA board until the president appoints and the Senate confirms his replacement as a board member. However, as authorized by the Farm Credit Act, the president can designate another FCA board member to serve as FCA chairman and CEO as soon as the current chairman’s term as an FCA board member expires even if that person stays on the FCA board.

Most importantly, that designation does not require Senate confirmation, which differs from the situation at many other federal boards and commissions, notably the FDIC and the Federal Reserve’s Board of Governors, where the Senate has to confirm someone’s appointment as chairman of that board even if that person already is serving on the board. Congress should extend that policy to the FCA by amending the Farm Credit Act to require Senate confirmation of the person designated by the president to serve as FCA chairman and CEO even if that person already is an FCA board member. That confirmation requirement would enable the Senate Agriculture Committee to hold a hearing at which it could quiz the prospective chairman about how he or she will manage the FCA and, most importantly, enforce the Farm Credit Act and specifically its lending restrictions.

FCA board gets update on FCS’s YBS lending
At its November 10 meeting, the FCA board was presented with an update on the FCS’s lending to young, beginning, and small farmers.  The report provides some interesting demographic information on trends in American agriculture as they relate to the age of farm operators, farm operator experience, number of farms with annual farm sales above and below $250,000, and gross farm revenues by type of revenue – crops, animals, farm-related, and direct government payments (see pages 9 to 23). However, the report is highly misleading with regard to the FCS’s YBS lending.

First, the report perpetuates the double and triple counting of YBS lending – a loan to a farmer who is 35 or younger (a young farmer), with ten or less years of farming experience (a beginning farmer), and with gross annual agricultural sales of less than $250,000 is counted three times in the FCS tally of its lending to YBS farmers.

Second, although the report noted that YBS data is reported annually on the volume of new YBS loans made during the year as well as outstanding YBS loans at yearend, the report given to FCA board only presented data on new YBS loans as a percentage of all new FCS loans. No data was provided on a much more important statistic – the amount of loans outstanding at yearend to YBS borrowers as a percentage of total FCS loans outstanding. As the June FCW reported, even with the FCS’s double-and triple-counting of its FCS lending, FCS lending to YBS farmers and ranchers has declined in recent years, which is not surprising given the FCS’s increase in very large loans.

AgriBank interim CEO gets the job outright
As the August FCW reported, on July 29, AgriBank, one of the four FCS banks providing funding and other services to FCS associations, announced the sudden “departure” of its long-time CEO, Bill York. No reason was given at the time as to why the 62-year-old CEO suddenly departed the bank. AgriBank’s retired vice president and general counsel, William Throne, was named interim CEO on August 1. On November 15, AgriBank announced that Throne would “assume the role of CEO,” effective December 1. There was no indication of the nature of search process that led to Throne’s designation as CEO or any explanation as to why York suddenly departed AgriBank in July.

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About Bert Ely

Bert Ely
Bert Ely is a consultant specializing in banking issues. He writes ABA's monthly Farm Credit Watch email bulletin.