NRUC

Business Context and Reporting Period

Company: National Rural Utilities Cooperative Finance Corporation (CFC), a private, not-for-profit cooperative providing financing to rural electric and telecommunications cooperatives.

Reporting Period: Quarterly report (Form 10-Q) for the period ended November 30, 1999 (Six months ended November 30, 1999).

Structure: Financials are combined for CFC and its controlled affiliates, Rural Telephone Finance Cooperative (RTFC) and Guaranty Funding Cooperative (GFC).

Key Financial Metrics

Income Statement (Six Months Ended Nov 30, 1999)

Key Ratios: Times Interest Earned (TIER) was 1.12x. Leverage ratio increased to 7.59 (from 7.00). Debt/Equity ratio increased to 6.00 (from 5.52).

Material Changes vs. Prior Period

• Asset Growth: Total assets increased by $1.49 billion (10.7%) driven primarily by a $1.47 billion increase in net loans to members.
• Profitability: Net margins increased by $9.9 million (27.6%) to $45.6 million, attributed to a 29% increase in average loan volume.
• Loan Portfolio: Long-term loans grew by $1.18 billion. The percentage of fixed-rate loans decreased from 63% to 58%.
• Restructured Loans: Restructured loans totaled $578.1 million, a slight increase from $576.7 million, primarily due to the Deseret Generation & Transmission Co-operative restructuring.
• Non-Performing Loans: Increased significantly from $1.6 million to $29.6 million, though still representing only 0.17% of total loans and guarantees.
• Guarantees: Total guarantees outstanding increased by $93.4 million to $1.78 billion, largely due to irrevocable letters of credit related to Deseret.

Outlook, Risks, and Contingencies

Management Commentary & Outlook

Management attributes loan growth to a strong economy, high RUS waiting periods prompting buyouts, and expansion in telecommunications. CFC expects its leverage ratio to increase modestly as it obtains external capital to accommodate loan growth. The company maintains a policy to limit fixed-rate loans funded by variable-rate debt to 3% or less of total assets (currently 2.1%).

Material Risks and Contingencies

• Deseret Contingency: CFC has significant exposure to Deseret Generation & Transmission Co-operative ($668.2 million total exposure). Deseret is under a restructuring agreement (ORA) requiring payments through 2025. CFC believes it has adequately reserved for potential losses.
• Interest Rate Risk: Primary market risk. CFC uses interest rate exchange agreements (notional amount $3.41 billion) to manage the mismatch between fixed-rate assets and variable-rate liabilities.
• Liquidity Risk: CFC relies on rolling over short-term commercial paper. It maintains $5.49 billion in revolving credit agreements to mitigate this risk.
• Derivative Accounting: CFC is required to implement SFAS No. 133 (Accounting for Derivative Instruments) by June 1, 2001. The impact on financial position has not yet been determined.

Investor Verification Checklist

• Deseret Restructuring Status: Verify continued compliance with the Obligations Restructuring Agreement (ORA) and the adequacy of the $96 million allowance allocated to impaired Deseret loans.
• Interest Rate Sensitivity: Assess the impact of rising interest rates on the 42% of the loan portfolio that is variable-rate and the cost of rolling over $6.39 billion in short-term notes payable.
• Capital Adequacy: Monitor the trend of the leverage ratio (currently 7.59) and the declining percentage of capitalization provided by members (19.9%) versus external debt.
• Non-Performing Assets: Investigate the specific borrowers contributing to the jump in non-performing loans from $1.6 million to $29.6 million.
• Derivative Exposure: Review the counter-party risk associated with $3.41 billion in interest rate exchange agreements, noting that all counterparties are highly rated (A to AAA).