Farm Credit Watch: Frontier Communications Should Repay All of Its CoBank Loan

By Bert Ely

In the June 2015 Farm Credit Watch, I reported that Frontier Communications Corp. had entered into a $350 million “credit agreement” with CoBank to partially finance Frontier’s $2 billion acquisition of AT&T’s wireline business in Connecticut. Frontier is an investor-owned, Nasdaq-listed telecommunications company with $24.7 billion of assets at March 31, 2018; it is hardly a local telephone co-operative Congress intended CoBank to finance. In October 2016, Frontier entered into a second credit agreement with CoBank for a $315 million term loan, raising the total amount CoBank lent to Frontier to $665 million. According to Frontier’s March 31, 2018, SEC 10-Q report, the two-term loans had been paid down to $504 million. On July 3 of this year, Frontier borrowed $240 million from another lender so that it could fully repay its 2014 loan from CoBank and partially repay its 2016 CoBank loan.

Barring subsequent loan pay downs, Frontier still owes $264 million to CoBank. While Frontier does not have great credit ratings (Moody’s B2 and S&P B+ on senior secured debt) the fact that Frontier recently borrowed $240 million from another lender clearly indicates that it can readily access the capital markets, which raises this question: Why did Frontier not pay off all of its CoBank debt or, to pose this question another way, why didn’t CoBank ask Frontier to repay its entire CoBank borrowing so that CoBank could erase this inappropriate loan from its balance sheet? The Farm Credit Administration, CoBank’s regulator, certainly should lean on CoBank to terminate its relationship with Frontier.

ArborOne video misrepresents itself and its patronage dividend
A banker recently sent me this short (2 minute-plus) video produced by ArborOne Farm Credit to describe its patronage dividend program. I encourage FCW readers to view it as it concisely illustrates some common misrepresentations by FCS associations in pitching loans to prospective borrowers. ArborOne is a relatively small (assets of $473 million) FCS association serving 12 counties in eastern South Carolina. While ArborOne mentions on its website’s home page that it is federally chartered and separately that it is a “proud member of the Farm Credit System,” it does not explain that the FCS is a GSE which enjoys substantial tax advantages and federal backing by virtue of being a GSE. While the video mentions twice that it is a cooperative, twice it also refers to itself as a company, but it makes no reference to the Farm Credit System or to ArborOne’s GSE status.

Especially disturbing are implied promises in the video about ArborOne’s patronage program. The video gives an illustration of how the patronage dividend or “distribution” is calculated and paid — some in cash and some in a deferred pay-out — but strongly implies that a patronage dividend is guaranteed to be paid every year. Worse, the example presented in the video suggests that on a 6 percent loan, the dividend or interest rebate would be 1 percent of the loan amount; at another point, the video states that ArborOne’s goal is to rebate 25 percent of the interest paid. While noting that the ArborOne board decides each year how much to rebate to borrowers, what is not pointed out is there could be years in which no patronage is paid, as has occurred elsewhere in the FCS. As part of its ongoing oversight of FCS institutions, the FCA should evaluate FCS websites and promotional videos to ensure that they are factually correct and do not misrepresent the GSE status of FCS institutions.

Senate Farm Bill would expand definition of YBS borrowers
A provision in the Senate version of the Farm Bill, which was passed on June 27, would expand the definition of young, beginning, and small farmers and ranchers to include “socially disadvantaged farmers and ranchers.” Under existing law, such farmers and ranchers are members of a group “whose members have been subjected to racial or ethnic prejudice because of their identity as members of a group without regard to their individual qualities.” Whether the House will accept this provision is unknown. A question to consider: Why is this provision even needed since FCS lenders should not discriminate against prospective borrowers because of their race or ethnicity?

If this provision is included in the final version of the next Farm Bill, the FCA will have to draft a regulation incorporating the collection of data on FCS lending to socially disadvantaged farmers and ranchers into the existing procedures that quantify FCS lending to YBS farmers. As I have explained in previous FCWs the YBS lending data the FCA now publishes is a mess; adding in data on FCS lending to socially disadvantaged farmers and ranchers would make this data even more misleading.

Presently, a loan to a young (age 35 years or younger), beginning (engaged in farming 10 or fewer years), and/or small (annual gross agricultural or aquatic sales less than $250,000) gets counted three times in the YBS data — once as a young, once as a beginning, and again as a small farmer. If a YBS farmer or rancher also was classified as socially disadvantaged, then a loan to such a farmer would have to be counted four times. If that farmer had three FCS loans, then the loans to that farmer would be counted twelve times in the YBS data, greatly exaggerating FCS lending to YBS and socially disadvantaged farmers and ranchers. The ABA has long opposed this double and triple-counting because doing so exaggerates the extent of the FCS’s YBS lending. In other reports, the FCS has demonstrated that it can aggregate all loans to a farmer or rancher so that it can show the total amount of credit the FCS has provided to a particular borrower. This means the FCA, if it was so inclined or was directed by the ag committees, could publish data on lending to designated types of famers without exaggerating that data by double, triple, or quadruple counting individual loans to a particular farmer.

Does the FCA need Dodd-Frank-like resolution powers?
Another section of the Senate version of the Farm Bill not in the House version would greatly expand the powers of the Farm Credit System Insurance Corporation  to act as a conservator or receiver for any FCS institution. This provision accounts for about 10 percent of the total length of the Senate version of the Farm Bill. The Farm Credit Act already sets out, although not in great detail, the powers the FCA and FCSIC need in order to resolve an insolvent FCS institution. Whether the FCA requested this expansion of its resolution powers is not known, but given the length and legal complexity of the provision, the FCA most likely is its sponsor. If so, then the question is why now? Why is the FCA seeking these more extensive resolution powers, which are modeled in part on resolution provisions in the Dodd-Frank Act? Does the FCA see some looming financial problems within American agriculture that could lead to the failure of some FCS institutions, as occurred in the 1980s as a result of that decade’s ag crisis. Hopefully these questions will be addressed when a House-Senate conference committee resolves the differences between the two farm bills.