[Federal Register Volume 66, Number 154 (Thursday, August 9, 2001)]
[Rules and Regulations]
[Pages 41755-41772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19981]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
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Federal Register / Vol. 66, No. 154 / Thursday, August 9, 2001 /
Rules and Regulations
[[Page 41755]]
DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Part 1744
RIN 0572-AB48
Post-Loan Policies and Procedures Common to Guaranteed and
Insured Loans
AGENCY: Rural Utilities Service, USDA.
ACTION: Final rule.
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SUMMARY: Recent changes in the telecommunications industry, including
deregulation and technological developments, have caused Rural
Utilities Service (RUS) borrowers and other organizations providing
telecommunications services to consider undertaking projects that
provide new telecommunications services and other telecommunications
services not ordinarily financed by RUS. To facilitate the financing of
those projects and services, RUS is willing to consider accommodating
the Government's lien on telecommunications borrowers' systems in an
expedited manner based on the financial strength of the borrowers
operations. This will help enable RUS telecommunications providers to
compete in an expanding number of telecommunications services may be
critical to their financial strength and stability.
EFFECTIVE DATE: This rule is effective August 9, 2001.
FOR FURTHER INFORMATION CONTACT: Jonathan P. Claffey, Deputy Assistant
Administrator, Telecommunications Program, Rural Utilities Service,
U.S. Department of Agriculture, 1400 Independence Avenue, SW., STOP
1590, Room 4056, Washington, DC 20250-1590. Telephone number (202) 720-
9556.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This rule has been determined to be significant for purposes of
Executive Order 12866 and therefore has been reviewed by the Office of
Management and Budget (OMB).
Executive Order 12372
This rule is excluded from the scope of Executive Order 12372,
Intergovernmental Consultation, which may require a consultation with
State and local officials. See the final rule related notice entitled,
``Department Programs and Activities Excluded from Executive Order
12372'' (50 FR 47034).
Executive Order 12988
This rule has been reviewed under Executive Order 12988, Civil
Justice Reform. RUS has determined that this rule meets the applicable
standards provided in section 3 of the Executive Order. In addition,
all State and local laws and regulations that are in conflict with this
rule will be preempted, no retroactive effort will be given to this
rule, and, in accordance with sec. 212(e) of the Department of
Agriculture Reorganization Act of 1994 (7 U.S.C. Sec. 6912(e)),
administrative appeal procedures, if any, must be exhausted before an
action against the Department or its agencies may be initiated.
Regulatory Flexibility Act Certification
RUS has determined that this rule will not have a significant
economic impact on a substantial number of small entities, as defined
in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The RUS
telecommunications program provides loans to borrowers at interest
rates and on terms that are more favorable than those generally
available from the private sector. RUS borrowers, as a result of
obtaining federal financing, receive economic benefits that exceed any
direct economic costs associated with complying with RUS regulations
and requirements.
Information Collection and Recordkeeping Requirements
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
chapter 35), RUS invites comments on this information collection for
which RUS intends to request approval from the Office of Management and
Budget (OMB). These requirements have been approved by emergency
clearance under OMB Control Number 0572-0126.
Comments on this information collection must be received by October
9, 2001.
Comments are invited on (a) whether the collection of information
is necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility; (b) the
accuracy of the agency's estimate of burden including the validity of
the methodology and assumption used; (c) ways to enhance the quality,
utility and clarity of the information to be collected; and (d) ways to
minimize the burden of the collection of information on those who are
to respond, including through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology.
Comments may be sent to F. Lamont Heppe, Jr., Director, Program
Development and Regulatory Analysis, Rural Utilities Service, U.S.
Department of Agriculture, 1400 Independence Ave., SW., Stop 1522, Room
4034 South Building, Washington, D.C. 20250-1522.
Title: 7 CFR part 1744, subpart B, ``Lien Accommodation and
Subordination Policy''
Type of Request: New collection.
Estimate of Burden: Public reporting burden for this collection of
information is estimated to average 1 hour per respondent.
Respondents: Business or other for-profit and non-profit
institutions.
Estimated Number of Respondents: 30.
Estimated Number of Responses per Respondent: 2.
Estimated Total Annual Burden on Respondents: 23.
Copies of this information collection can be obtained from Michele
Brooks, Program Development and Regulatory Analysis, at (202) 690-1078.
All responses to this information collection and recordkeeping
notice will be summarized and included in the request for OMB approval.
All comments will also become a matter of public record.
National Environmental Policy Act Certification
The Administrator of RUS has determined that this rule will not
significantly affect the quality of the human environment as defined by
the
[[Page 41756]]
National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).
Therefore, this action does not require an environmental impact
statement or assessment.
Catalog of Federal Domestic Assistance
The program described by this rule is listed in the Catalog of
Federal Domestic Assistance Programs under number 10.851, Rural
Telephone Loans and Loan Guarantees; and number 10.852, Rural Telephone
Bank Loans. This catalog is available on a subscription basis from the
Superintendent of Documents, the United States Government Printing
Office, Washington, DC 20402-9325.
Unfunded Mandates
This rule contains no Federal mandates (under the regulatory
provisions of Title II of the Unfunded Mandates Reform Act of 1995) for
State, local, and tribal governments or the private sector. Thus, this
rule is not subject to the requirements of section 202 and 205 of the
Unfunded Mandates Reform Act of 1995.
Background
RUS is amending its regulations covering lien accommodations under
certain circumstances where the borrower's financial strength is
sufficient to protect security for the Government's loans and the
lender seeking a lien accommodation.
Since the passage of the Telecommunications Act of 1996, which
provides for a competitive, deregulated national telecommunications
policy framework, the Federal Communications Commission (FCC) has been
working to implement the provisions of the law. As those provisions
begin to be integrated through the FCC's rulemaking process, the FCC is
focusing on the types of telecommunications service that must be made
available to all Americans; i.e. part of universal service, and the
benefits to all Americans from advanced services for schools,
libraries, and rural health care providers. The newly competitive
environment will undoubtedly affect the rural telecommunications
marketplace. For the industry as a whole--urban and rural--competition
will offer the means for delivering the universal service concept
envisioned by the Telecommunications Act of 1996. In the competitive
marketplace of the future, investment in infrastructure will be
lucrative in markets where local exchange carriers seek to attract
high-usage, low-cost subscribers. Competition will be fierce and
customers will be the winners as their demands for new and improved
service at affordable rates will be met. Yet in rural and high-cost
areas, where quality of service and advanced service offerings are just
as important, there is less potential for investment based on
competition. Investment will need to be encouraged in the form of
incentives through the universal support mechanisms and the lending
programs of RUS, as well as private sources of financing. RUS will
continue its partnership with rural America to ensure that
telecommunications providers will have the means to modernize their
networks; however, industry deregulation and new technological
developments have caused RUS borrowers and other organizations
providing telecommunications services to consider undertaking projects
that provide new telecommunications services and other
telecommunications services not ordinarily financed by RUS. Although
some of these services may not be eligible for financing under the
Rural Electrification Act of 1936 (RE Act), these services may
nevertheless advance RE Act objectives where the borrower obtains
financing from private lenders.
Due to the changing environment of the telecommunications industry,
large or predominately non-rural local exchange carriers (LECs) are
selling their more rural exchanges in order to concentrate on their
more lucrative service areas. This ``sell-off'' provides an opportunity
for rural LECs to expand their service territories. Typically, these
acquired exchanges will need infrastructure improvements and the rural
LECs will work hard to provide state-of-the-art service. This will
require increased investment. RUS loans for infrastructure building can
enable rural LECs to upgrade plant and service territories that may
have been neglected for years. All subscribers, urban and rural,
benefit from improvements to the national network. While opportunities
exist for rural LECs to expand their markets and continue the tradition
of providing the best possible service available to rural residents,
uncertainties regarding future revenue streams and the availability of
funds from universal service support may hamper some small LECs'
investment decisions. The amendments to this regulation will help to
facilitate funding from non-RUS sources in order to meet the growing
capital needs of rural LECs. Depending on the purposes for which a lien
accommodation is being sought, RUS will provide ``automatic'' approval
for borrowers that meet the financial tests described in this rule. RUS
believes that borrowers that are financially sound should be afforded
more flexibility with regard to financial arrangements with outside
lenders for the purpose of promoting rural telecommunications. The
tests are designed to ensure that the financial strength of the
borrower is more than sufficient to protect the government's loan
security interests; hence, the lien accommodations will not adversely
affect the government's financial interests.
In addition to providing for automatic lien accommodations, this
amendment removes the requirement for borrowers seeking lien
accommodations to comply with competitive bid procedures under 7 CFR
part 1753. Further, RUS proposes to address other concerns involved in
the accommodation of the Government's lien for those borrowers that do
not qualify for an automatic lien accommodation in a subsequent
revision to this subpart.
Comments
A proposed rule was published December 15, 1999, at 64 FR 69946.
During the comment period that ended February 14, 2000, RUS
received comments from the following organizations:
(1) Cooper, White & Cooper LLR, representing:National Rural Telecom
AssociationOrganization for the Protection and Advancement of
SmallTelecommunications CompaniesUnited States Telecom Association;
andWestern Rural Telephone Association
(2) Rural Telephone Finance Cooperative; and
(3) CoBank.
The comments and RUS' responses follow:
Comment summary. The respondents commented that RUS should utilize
consolidated financial reports when determining a borrower's
eligibility for an ``automatic'' lien accommodation under this rule,
rather than unconsolidated borrower financial statements that reflect
only the telecommunication company's or cooperative's financial
condition.
RUS response. When dealing with the security of the government's
loans, RUS must rely on the financial strength of the borrower and its
ability to survive economically based on its ``telecommunications
service'' operations. Basing financial tests on consolidated statements
may distort the true health of the borrower's financial position with
regards to its operations. In addition, the RUS mortgage does not
provide a lien on assets not held by the
[[Page 41757]]
borrower and therefore, RUS believes the best measure is to use
unconsolidated statements.
Comment summary. The respondents request that RUS implement rule
changes that would allow a borrower to effect the release of lien of
the government's mortgage on after-acquired property upon a showing of
sufficient financial strength to ensure that the government's security
interest is adequate to protect the RUS loan.
RUS response. RUS disagrees with this position. RUS views each
borrower as an `on-going' project whereby the strength of its
operations as a whole is needed to adequately secure the government's
interests. Commercial operations are oftentimes cyclical and evidence
of current financial strength is not an insurance of future financial
performance.
Comment summary. The respondents requested that RUS clarify whether
TIER and Debt Service were calculated on a before or after-tax basis.
RUS response. As noted in the definition section, both ratios use
`net income', denoting that the calculations are after income taxes.
Comment summary. The respondents requested that RUS eliminate the
requirement that the weighted average life of the new private lender
notes does not exceed the remaining weighted average life of the notes
being refinanced, stating that in some cases, longer maturity periods
that would reduce debt service payment could improve cash flow. In
addition, the respondents requested that the terms of the loans be
measured by the borrowers ability to repay the loan as indicated by
TIER and Debt Service Coverage.
RUS response. Increasing the life of the loan beyond the remaining
original life could have the effect of severely under-collaterallizing
the debt, thereby putting the lenders at risk of not having sufficient
assets to provide adequate security. An open-ended maturity period, as
suggested by relying on TIER and Debt Service Coverage indicators, only
exacerbates the lenders' risks.
Comment summary. RUS should increase the principal amount of a loan
from a private lender to refinance or refund the Government's loan from
not greater than 105 percent of the of the balance of the notes being
refunded or refinanced to not less than 112 percent, or eliminate the
percentage limitation altogether. The respondents propose that this
would allow borrowers to cover additional closing and fees associated
with the new financing.
RUS response. RUS recognizes that loans from private lenders may
contain fees and equity contribution requirements, and therefore, will
raise the percentage limitation from not more than 105 percent to not
more than 112 percent. This should provide a reasonable level at which
borrowers seeking to finance closing costs and associated fees and
equity contributions would be able to do so.
Comment summary. Sections 1744.30(c)(2)(iii) and (iv) could be in
conflict with each other if the number of years remaining on a loan to
be refinanced is less than five. Paragraph (c)(2)(iv) requires the
refinancing to be amortized for a period of not less than five years.
RUS response. RUS agrees that there is the potential for conflict
in the way the proposed rule worded those sections. The final rule has
been modified to allow for the amortization period of the loan to be,
at a minimum, the original remaining years to maturity.
Comment summary. The respondents stated a preference for a net
assets to long-term debt test instead of the proposed net plant to
long-term debt test in Secs. 1744.30(d)(2) and 1744.30(e)(2). As stated
in the rule, the ratio includes, on a pro-forma basis, the new private
lender debt but does not include the plant associated with that debt.
In addition, where the proceeds of the private lender debt go to a
subsidiary, even if the formula accounted for the new assets, they
would not be recorded on the borrower's balance sheet, thereby reducing
the borrower's ability to meet the test. The respondents argued that
using net assets, where the borrower owns assets that are not counted
as plant, would be better since many borrowers have substantial assets
that are not plant.
RUS response. The premise behind providing ``automatic'' lien
accommodations is based on the strength of a borrower's financial
condition and a negligible potential for loan security risk based on
that strength. Using net plant rather than net assets counts only those
assets on which the government's mortgage provides a perfected first
lien. RUS has, however, revised the ratio test to include, on a pro-
forma basis, the associated plant to be added by the private lender
debt, when that plant is owned directly by the borrower. In the case of
a borrower flowing through the proceeds of the private lender debt to a
subsidiary, RUS believes that the borrower should have sufficient net
plant need to provide RUS with adequate security necessary for the
``automatic'' lien accommodation, since the subsidiary's assets
(financed through the lien accommodation) are not covered by the
government's mortgage.
Comment summary. The respondents stated that RUS should consider
including ``non-plant'' costs, such as transaction fees, working
capital, and goodwill, associated with exchanges or purchases as
eligible costs for lien accommodations under the regulation. They
stated that these costs are typically contemplated in the purchase of
existing systems as well as in new projects and that if private lenders
were willing to finance these ``non-plant'' costs, RUS should not
object to inclusion of these costs under the lien of the mortgage.
RUS response. The ``soft costs'' associated with the construction
or acquisition of assets provide little or no tangible security.
Accommodating payment of such costs under the lien of the mortgage
would dilute the security of the other mortgage.
Comment summary. The respondents questioned the need for the
certification from the borrower's CPA to the financial tests required
in sections 1744(d)(5) and (e)(5), and stated that since RUS already
had borrowers' CPA audits, certification should only be required when
the audit had not yet been received by RUS.
RUS response. The CPA audit does not calculate nor attest to a
borrower's achievement of TIER or Debt Service Coverage. The assurance
provided by the CPA's certification of the borrower's achievement of
the financial requirements is crucial to the ``automatic'' lien
accommodation process. To expedite the process, borrowers may wish to
have the CPA prepare the certification at the completion of the annual
audit, thereby eliminating the need for further participation by the
CPA.
Comment summary. The respondents objected to the provision that the
financing agreement between the borrower and the private lender provide
for the private lender to terminate advances on its loan to the
borrower when the borrower is in default under the terms of its
mortgage with RUS. They argue that this places an undue burden on the
private lender that is contractually obligated to advance funds under
the terms of its loan. The respondents stated that once the terms of
the ``automatic'' lien accommodation have been met, RUS should take the
risk for the facility financed. Further, the respondents stated that
the burden should be placed on the borrower to cease the request for
advances, not on the private lender.
RUS response. As a provision for obtaining an automatic lien
accommodation (which does not require RUS approval when the criteria
contained in the regulation are met), to
[[Page 41758]]
protect the security for the Government's loans, the borrower should
cease to incur additional private debt when it is in default on the
Government's loans. Further, the respondents incorrectly view the
burden as being placed on the private lender, and not on the borrower.
The regulation clearly states that the financing agreement, a document
prepared and executed prior to the advance of funds, contain the
provision for termination of advance of funds upon request by RUS. In
the event of a default, RUS would notify the borrower and the private
lender so that they could comply with the termination of advance of
funds provision. Therefore, notice to the private lender would not
place the private lender under two inconsistent obligations.
Comment summary. Section 1744.30(e) pertains only to ``wholly-
owned'' subsidiaries and is silent as to structures in which a borrower
is a participant in a joint venture or partnership. The respondents
argue that these types of projects are often undertaken for the mutual
benefit of numerous telecommunications providers and that the
regulation should make provision for these increasingly common
ventures.
RUS response. At the present time, RUS believes that limiting the
applicability of ``automatic'' lien accommodations to wholly-owned
subsidiaries is prudent and in the best interest of protecting security
for the Government's loans. Borrowers are, of course, not prevented
from requesting approval for a lien accommodation under the traditional
procedures for these types of projects. The comment is, however,
beneficial and RUS will take it under advisement for future policy
discussion.
Comment summary. The respondents argue that the financial tests in
Secs. 1744.30(e)(1) (TIER not less than 2.5 and DSC not less than 1.5)
and (e)(3) (equity percentage not less than 45 percent) seem excessive
and may result in most RUS or RTB borrowers failing to qualify for
automatic lien accommodations when the assets are to be owned by a
subsidiary.
RUS response. The financial tests required when the assets are to
be owned by a subsidiary are more stringent, by design, and are
intended to ensure that only the healthiest, strongest borrowers
qualify, since there is no direct tie to assets being funded in
relation to the security that RUS is giving up. By RUS' calculation,
based on the most recent financial data available, 40% of RUS'
telecommunications borrowers qualify. As noted before, in the case of a
borrower flowing through the proceeds of the private lender debt to a
subsidiary, RUS believes that the borrower should have sufficient
financial strength to provide RUS with adequate security, since the
subsidiary's assets (financed through the lien accommodation) are not
subject to the lien of the borrower's mortgage with RUS.
Comment summary. The respondents inquired whether an equity
investment in a subsidiary, as opposed to a loan, would be permissible.
In addition, the respondents believed there may be some conflict in
RUS' treatment of loans to subsidiaries as investments allowed under
the borrower's current mortgage with RUS.
RUS response. Equity investments or contributions are clearly
different from loans with defined repayment terms and contractual
agreements. RUS intended to only provide for loans to the subsidiary.
RUS further has provided, in section 1744.30(i)(2), that such loans,
when made in accordance with the terms of this regulation, do not
require RUS approval as investments in affiliated companies, thereby
releasing the borrower from obtaining ``double'' approval for the same
investment.
Comment summary. Clarification was requested with regard to
Sec. 1744.30(e)(6)(vii), regarding the submission, upon request by RUS,
of the financing or guarantee agreement between the borrower and the
subsidiary.
RUS response. This section is only intended to ensure that RUS has
the right to review the terms and conditions, if merited, of the
borrower's loan or guarantee of a loan to its subsidiary. With regard
to loan guarantees, where the debt exists at the subsidiary level, and
the borrower is guaranteeing the debt, automatic approval of a lien
accommodation under this section would permit the guarantee of the debt
without having it count against the borrower's allowable distribution
of capital as contained in the borrower's mortgage with RUS.
Comment summary. The respondents requested that RUS provide
acknowledgement for an automatic lien accommodation to the private
lender in addition to the acknowledgement to the borrower.
RUS response.
RUS agrees and will provide such acknowledgment.
List of Subjects in 7 CFR Part 1744
Accounting, Loan programs-communications, Reporting and
recordkeeping requirements, Rural areas, Telephone.
For reasons set out in the preamble, RUS amends 7 CFR chapter XVII
as follows:
PART 1744--POST-LOAN POLICIES AND PROCEDURES COMMON TO GUARANTEED
AND INSURED TELEPHONE LOANS
1. The authority citation for part 1744 is revised to read as
follows:
Authority: 7 U.S.C. 901 et seq., 1921 et seq., and 6941 et seq.
Subpart B--Lien Accommodations and Subordination Policy
2. Sections 1744.20 and 1744.21 are revised to read as follows:
Sec. 1744.20 General.
(a) Recent changes in the telecommunications industry, including
deregulation and technological developments, have caused Rural
Utilities Service (RUS) borrowers and other organizations providing
telecommunications services to consider undertaking projects that
provide new telecommunications services and other telecommunications
services not ordinarily financed by RUS. Although some of these
services may not be eligible for financing under the Rural
Electrification Act of 1936 (RE Act), these services may nevertheless
advance RE Act objectives where the borrower obtains financing from
private lenders. The borrower's financial strength and the assurance of
repayment of outstanding Government debt may be improved as a result of
providing such telecommunications services.
(b) To facilitate the financing of new services and other services
not ordinarily financed by RUS, RUS is willing to consider
accommodating the Government's lien on telecommunications borrowers'
systems or accommodating or subordinating the Government's lien on
after-acquired property of telecommunications borrowers. To expedite
this process, requests for lien accommodations meeting the requirements
of Sec. 1744.30 will receive automatic approval from RUS.
(c) This subpart establishes RUS policy with respect to all
requests for lien accommodations and subordinations for loans from
private lenders. For borrowers that do not qualify for automatic lien
accommodations in accordance with Sec. 1744.30, RUS will consider lien
accommodations for RE Act purposes under Sec. 1744.40 and non-Act
purposes under Sec. 1744.50.
[[Page 41759]]
Sec. 1744.21 Definitions.
The following definitions apply to this subpart:
Administrator means the Administrator of RUS and includes the
Governor of the RTB.
Advance means transferring funds from RUS, RTB, or a lender
guaranteed by RUS to the borrower's construction fund.
After-acquired property means property which is to be acquired by
the borrower and which would be subject to the lien of the Government
mortgage when acquired.
Amortization expense means the sum of the balances of the following
accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Amortization expense..................................... 6560.2
(2) Amortization expense--tangible........................... 6563
(3) Amortization expense--intangible......................... 6564
(4) Amortization expense--other.............................. 6565
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Asset means a future economic benefit obtained or controlled by the
borrower as a result of past transactions or events.
Automatic lien accommodation means the approval, by RUS, of a
request to share the Government's lien on a pari passu or pro-rata
basis with a private lender in accordance with the provisions of
Sec. 1744.30.
Borrower means any organization that has an outstanding
telecommunications loan made or guaranteed by RUS, or that is seeking
such financing. See 7 CFR part 1735.
Construction Fund means the RUS Construction Fund Account into
which all advances of loan funds are deposited pursuant to the
provisions of the loan documents.
Debt Service Coverage (DSC) ratio means the ratio of the sum of the
borrower's net income, depreciation and amortization expense, and
interest expense, all divided by the sum of all payments of principal
and interest required to be paid by the borrower during the year on all
its debt from any source with a maturity greater than 1 year and
capital lease obligations.
Default means any event or occurrence which, unless corrected,
will, with the passage of time and the giving of proper notices, give
rise to remedies under one or more of the loan documents.
Depreciation expense means the sum of the balances of the following
accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Depreciation expense..................................... 6560.1
(2) Depreciation expense--telecommunications plant in service 6561
(3) Depreciation expense--property held for future 6562
telecommunications use......................................
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Disbursement means a transfer of money by the borrower out of the
construction fund in accordance with the provisions of the fund.
Equity percentage means the total equity or net worth of the
borrower expressed as a percentage of the borrower's total assets.
FFB means the Federal Financing Bank.
Financial Requirement Statement (FRS) means RUS Form 481 (OMB--No.
0572--0023). (This RUS Form is available from RUS, Program Development
and Regulatory Analysis, Washington, DC 20250-1522).
Government mortgage means any instrument to which the Government,
acting through the Administrator, is a party and which creates a lien
or security interest in the borrower's property in connection with a
loan made or guaranteed by RUS whether the Government is the sole
mortgagee or is a co-mortgagee with a private lender.
Hardship loan means a loan made by RUS under section 305(d)(1) of
the RE Act.
Interim construction means the purchase of equipment or the conduct
of construction under an RUS-approved plan of interim financing. See 7
CFR part 1737.
Interest expense means the sum of the balances of the following
accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Interest and related items............................... 7500
(2) Interest on funded debt.................................. 7510
(3) Interest expense--capital leases......................... 7520
(4) Amortization of debt issuance expense.................... 7530
(5) Less Allowance for funds used during construction........ 7340/
7300.4
(6) Other interest deductions................................ 7540
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Interim financing means funding for a project which RUS has
acknowledged may be included in a loan, should said loan be approved,
but for which RUS loan funds have not yet been made available.
Lien accommodation means sharing the Government's lien on a pari
passu or pro-rata basis with a private lender.
Loan means any loan made or guaranteed by RUS.
Loan documents means the loan contract, note and mortgage between
the borrower and RUS and any associated document pertinent to a loan.
Loan funds means the proceeds of a loan made or guaranteed by RUS.
Material and supplies means any of the items properly recordable in
the following account of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Material and Supplies.................................... 1220.1
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Net income/Net margins means the sum of the balances of the
following accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Local Network Services Revenues....... 5000 through 5069
(2) Network Access Services Revenues...... 5080 through 5084
(3) Long Distance Network Services 5100 through 5169
Revenues.
(4) Miscellaneous Revenues................ 5200 through 5270
(5) Nonregulated Revenues................. 5280
(6) Less Uncollectible Revenues........... 5200 through 5302
(7) Less Plant Specific Operations Expense 6110 through 6441
(8) Less Plant Nonspecific Operations 6510 through 6565
Expense.
(9) Less Customer Operations Expense...... 6610 through 6623
(10) Less Corporate Operations Expense.... 6710 through 6790
(11) Other Operating Income and Expense... 7100 through 7160
(12) Less Operating Taxes................. 7200 through 7250/7200.5
(13) Nonoperating Income and Expense...... 7300 through 7370
(14) Less Nonoperating Taxes.............. 7400 through 7450/7400.5
(15) Less Interest and Related Items...... 7500 through 7540
(16) Extraordinary Items.................. 7600 through 7640/7600.4
(17) Jurisdictional Differences and 7910 through 7990
Nonregulated Income Items.
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Net plant means the sum of the balances of the following accounts
of the borrower:
[[Page 41760]]
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Property, Plant and Equipment......... 2001 through 2007
(2) Less Depreciation and Amortization.... 3100 through 3600
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Notes means evidence of indebtedness secured by or to be secured by
the Government mortgage.
Pari Passu means equably; ratably; without preference or
precedence.
Plant means any of the items properly recordable in the following
accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Property, Plant and Equipment......... 2001 through 2007
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Private lender means any lender other than the RUS or the lender of
a loan guaranteed by RUS.
Private lender notes means the notes evidencing a private loan.
Private loan means any loan made by a private lender.
RE Act (Act) means the Rural Electrification Act of 1936 (7 U.S.C.
901 et seq.) RTB means the Rural Telephone Bank.
RUS means the Rural Utilities Service, and includes its
predecessor, the Rural Electrification Administration. The term also
includes the RTB, unless otherwise indicated.
RUS cost-of-money loan means a loan made under section 305(d)(2) of
the RE Act.
Subordination means allowing a private lender to have a lien on
specific property which will have priority over the Government's lien
on such property.
Tangible plant means any of the items properly recordable in the
following accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Telecommunications Plant in Service-- 2110 through 2124
General Support Assets.
(2) Telecommunications Plant in Service-- 2210 through 2232
Central Office Assets.
(3) Telecommunications Plant in Service-- 2310 through 2362
Information Origination/Termination
Assets.
(4) Telecommunications Plant in Service-- 2410 through 2441
Cable and Wire Facilities Assets.
(5) Amortizable Tangible Assets........... 2680 through 2682
(6) Nonoperating Plant.................... 2006
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Telecommunication services means any service for the transmission,
emission, or reception of signals, sounds, information, images, or
intelligence of any nature by optical waveguide, wire, radio, or other
electromagnetic systems and shall include all facilities used in
providing such service as well as the development, manufacture, sale,
and distribution of such facilities.
Times interest earned ratio (TIER) means the ratio of the
borrower's net income or net margins plus interest expense, divided by
said interest expense.
Total assets means the sum of the balances of the following
accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Current Assets........................ 1100s through 1300s
(2) Noncurrent Assets..................... 1400s through 1500s
(3) Total telecommunications plant........ 2001 through 2007
(4) Less accumulated depreciation......... 3100 through 3300s
(5) Less accumulated amortization......... 3400 through 3600s
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Total equity or net worth means the excess of a borrower's total
assets over its total liabilities.
Total liabilities means the sum of the balances of the following
accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Current Liabilities................... 4010 through 4130.2
(2) Long-Term Debt........................ 4210 through 4270.3
(3) Other Liabilities and Deferred Credits 4310 through 4370
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Total long-term debt means the sum of the balances of the following
accounts of the borrower:
------------------------------------------------------------------------
Account names Number
------------------------------------------------------------------------
(1) Long-Term Debt........................ 4210 through 4270.3
------------------------------------------------------------------------
Note: All references to account numbers are to the Uniform
System of Accounts (7 CFR part 1770, subpart B).
Weighted-average life of the loans or notes means the average life
of the loans or notes based on the proportion of original loan
principal paid during each year of the loans or notes. It shall be
determined by calculating the sum of all loan or note principal
payments expressed as a fraction of the original loan or note principal
amount, times the number of years and fractions of years elapsed at the
time of each payment since issuance of the loan or note. For example,
given a $5 million loan, with a maturity of 5 years and equal principal
payments of $1 million due on the anniversary date of the loan, the
weighted-average life would be: (.2)(1 year) + (.2)(2 years) + (.2)(3
years) + (.2)(4 years) + (.2)(5 years) = .2 years + .4 years + .6 years
+ .8 years + 1.0 years = 3.0 years. If instead the loan had a balloon
payment of $5 million at the end of 5 years, the weighted-average life
would be: ($5 million/$5 million)(5 years) = 5 years.
Weighted-average remaining life of the loans or notes means the
remaining average life of the loans or notes based on the proportion of
remaining loan or note principal expressed in years remaining to
maturity of the loans or notes. It shall be determined by calculating
the sum of the remaining principal payments of each loan or note
expressed as a fraction of the total remaining loan or note amounts
times the number of years and fraction of years remaining until
maturity of the loan or note.
Weighted-average remaining useful life of the assets means the
estimated original average life of the assets to be acquired with the
proceeds of the private lender notes expressed in years based on
depreciation rates less the number of years those assets have been in
service (or have been depreciated). It shall be determined by
calculating the sum of each asset's remaining value expressed as a
fraction of the total remaining value of the assets, times the
estimated number of years and fraction of years remaining until the
assets are fully depreciated.
Wholly-owned subsidiary means a corporation owned 100 percent by
the borrower.
3. Sections 1744.30, 1744.40, and 1744.50 are redesignated as
Secs. 1744.40, 1744.50, and 1744.55, respectively.
[[Page 41761]]
4. New Sec. 1744.30 is added to read as follows:
Sec. 1744.30 Automatic lien accommodations.
(a) Purposes and requirements for approval. Automatic lien
accommodations are available only for refinancing and refunding of
notes secured by the borrower's existing Government mortgage; financing
assets, to be owned by the borrower, to provide telecommunications
services; or financing assets, to be owned by a wholly-owned subsidiary
of the borrower, to provide telecommunications services in accordance
with the procedures set forth in this section.
(b) Private lender responsibility. The private lender is
responsible for ensuring that its notes, for which an automatic lien
accommodation has been approved as set forth in this section, are
secured under the mortgage. The private lender is responsible for
ensuring that the supplemental mortgage is a valid and binding
instrument enforceable in accordance with its terms, and recorded and
filed in accordance with applicable law. If the private lender
determines that additional documents are required or that RUS must take
additional actions to secure the notes under the mortgage, the private
lender shall follow the procedures set forth in Sec. 1744.40 or
Sec. 1744.50, as appropriate.
(c) Refinancing and refunding. The Administrator will automatically
approve a borrower's execution of private lender notes and the securing
of such notes on a pari passu or pro-rata basis with all other notes
secured under the Government mortgage, when such private lender notes
are issued for the purpose of refinancing or refunding any notes
secured under the Government mortgage, provided that all of the
following conditions are met:
(1) No default has occurred and is continuing under the Government
mortgage;
(2) The borrower has delivered to the Administrator, at least 10
business days before the private lender notes are to be executed, a
certification and agreement executed by the President of the borrower's
Board of Directors, such certification and agreement to be
substantially in the form set forth in Appendix A of this subpart,
providing that:
(i) No default has occurred and is continuing under the Government
mortgage;
(ii) The principal amount of such refinancing or refunding notes
will not be greater than 112 percent of the then outstanding principal
balance of the notes being refinanced or refunded;
(iii) The weighted-average life of the private loan evidenced by
the private lender notes will not exceed the weighted-average remaining
life of the notes being refinanced or refunded;
(iv) The private lender notes will provide for substantially level
debt service or level principal amortization over a period not less
than the original remaining years to maturity;
(v) Except as provided in the Government mortgage, the borrower has
not agreed to any restrictions or limitations on future loans from RUS;
and
(vi) If the private lender determines that a supplemental mortgage
is necessary, the borrower will comply with those procedures contained
in paragraph (h) of this section for the preparation, execution, and
delivery of a supplemental mortgage and take such additional action as
may be required to secure the notes under the Government mortgage.
(d) Financing assets to be owned directly by a borrower. The
Administrator will automatically approve a borrower's execution of
private lender notes and the securing of such notes on a pari passu or
pro-rata basis with all other notes secured under the Government
mortgage, when such private lender notes are issued for the purpose of
financing the purchase or construction of plant and material and
supplies to provide telecommunication services and when such assets are
to be owned and the telecommunications services are to be offered by
the borrower, provided that all of the following conditions are met:
(1) The borrower has achieved a TIER of not less than 1.5 and a DSC
of not less than 1.25 for each of the borrower's two fiscal years
immediately preceding the issuance of the private lender notes;
(2) The ratio of the borrower's net plant to its total long-term
debt at the end of any calendar month ending not more than 90 days
prior to execution of the private lender notes is not less than 1.2, on
a pro-forma basis, after taking into account the effect of the private
lender notes and additional plant on the total long-term debt of the
borrower;
(3) The borrower's equity percentage, as of the most recent fiscal
year-end, was not less than 25 percent;
(4) No default has occurred and is continuing under the Government
mortgage;
(5) The borrower has delivered to the Administrator, at least 10
business days before the private lender notes are to be executed, a
certification by an independent certified public accountant that the
borrower has met each of the requirements in paragraphs (d)(1) and
(d)(3) of this section, such certification to be substantially in the
form in Appendix B of this subpart; and
(6) The borrower has delivered to the Administrator, at least 10
business days before the private lender notes are to be executed, a
certification and agreement executed by the President of the borrower's
Board of Directors, such certification and agreement to be
substantially in the form in Appendix C of this subpart: provided,
that:
(i) The borrower has met each of the requirements in paragraphs
(d)(2) and (d)(4) of this section;
(ii) The proceeds of the private lender notes are to be used for
the construction or purchase of the plant and materials and supplies to
provide telecommunications services in accordance with this section and
such construction or purchase is expected to be completed not later
than 4 years after execution of such notes;
(iii) The weighted-average life of the private loan evidenced by
the private lender notes does not exceed the weighted-average remaining
useful life of the assets being financed;
(iv) The private lender notes will provide for substantially level
debt service or level principal amortization over a period not less
than the original remaining years to maturity;
(v) All of the assets financed by the private loans will be
purchased or otherwise procured in bona fide arm's length transactions;
(vi) The financing agreement with the private lender will provide
that the private lender shall cease the advance of funds upon receipt
of written notification from RUS that the borrower is in default under
the RUS loan documents;
(vii) Except as provided in the Government mortgage, the borrower
has not agreed to any restrictions or limitations on future loans from
RUS; and
(viii) If the private lender determines that a supplemental
mortgage is necessary, the borrower will comply with those procedures
set forth in paragraph (h) of this section for the preparation,
execution, and delivery of a supplemental mortgage and take such
additional action as may be required to secure the notes under the
Government mortgage.
(e) Financing assets to be owned by a wholly-owned subsidiary of
the borrower. The Administrator will automatically approve a borrower's
execution of private lender notes and the securing of such notes on a
pari passu or pro-rata basis with all other notes secured under the
Government mortgage, when such private lender
[[Page 41762]]
notes are issued for the purpose of financing the purchase or
construction of tangible plant and material and supplies to provide
telecommunication services and when such services are to be offered and
the associated tangible assets are to be owned by a wholly-owned
subsidiary of the borrower, provided that all of the following
conditions are met:
(1) The borrower has achieved a TIER of not less than 2.5 and a DSC
of not less than 1.5 for each of the borrower's two fiscal years
immediately preceding the issuance of the private lender notes;
(2) The ratio of the borrower's net plant to its total long-term
debt at the end of any calendar month ending not more than 90 days
prior to execution of the private lender notes is not less than 1.6, on
a pro-forma basis, after taking into account the effect of the private
lender notes and additional plant on the total long-term debt of the
borrower;
(3) The borrower's equity percentage, as of the most recent fiscal
year-end, was not less than 45 percent;
(4) No default has occurred and is continuing under the Government
mortgage;
(5) The borrower has delivered to the Administrator, at least 10
business days before the private lender notes are to be executed, a
certification by an independent certified public accountant that the
borrower has met each of the requirements in paragraphs (e)(1) and
(e)(3) of this section, such certification to be substantially in the
form in Appendix D of this subpart; and
(6) The borrower has delivered to the Administrator, at least 10
business days before the private lender notes are to be executed, a
certification and agreement executed by the President of the borrower's
Board of Directors, such certification and agreement to be
substantially in the form in Appendix E of this subpart; providing
that:
(i) The borrower has met each of the requirements in paragraphs
(e)(2) and (e)(4) of this section;
(ii) The proceeds of the private lender notes are to be used for
the construction or purchase of the tangible plant and materials and
supplies to provide telecommunications services in accordance with this
section and such construction or purchase is expected to be completed
not later than 4 years after execution of such notes;
(iii) The weighted-average life of the private loan evidenced by
the private lender notes does not exceed the weighted-average remaining
useful life of the assets being financed;
(iv) The private lender notes will provide for substantially level
debt service or level principal amortization over a period not less
than the original remaining years to maturity;
(v) All of the assets financed by the private loans will be
purchased or otherwise procured in bona fide arm's length transactions;
(vi) The proceeds of the private lender notes will be lent to a
wholly-owned subsidiary of the borrower pursuant to terms and
conditions agreed upon by the borrower and subsidiary;
(vii) The borrower will, whenever requested by RUS, provide RUS
with a copy of the financing or guarantee agreement between the
borrower and the subsidiary or any similar or related material
including security instruments, loan contracts, or notes issued by the
subsidiary to the borrower;
(viii) The borrower will promptly report to the Administrator any
default by the subsidiary or other actions that impair or may impair
the subsidiary's ability to repay its loans;
(ix) The financing agreement with the private lender will provide
that the private lender shall cease the advance of funds upon receipt
of written notification from RUS that the borrower is in default under
the RUS loan documents;
(x) Except as provided in the Government mortgage, the borrower has
not agreed to any restrictions or limitations on future loans from RUS;
and
(xi) If the private lender determines that a supplemental mortgage
is necessary, the borrower will comply with those procedures contained
in paragraph (h) of this section for the preparation, execution, and
delivery of a supplemental mortgage and take such additional action as
may be required to secure the notes under the Government mortgage.
(f) Borrower notification. The borrower shall notify RUS of its
intention to obtain an automatic lien accommodation under Sec. 1744.30
by providing the following:
(1) The board resolution cited in Sec. 1744.55(b)(1) and the
opinion of counsel cited in Sec. 1744.55(b)(2);
(2) The applicable certification or certifications required by
paragraph (c)(2); paragraphs (d)(5) and (d)(6); or paragraphs (e)(5)
and (e)(6), respectively, of this section, in substantially the form
contained in the applicable appendices to this subpart.
(g) RUS acknowledgment. Within 5 business days of receipt of the
completed certifications and any other information required under this
section, RUS will review the information and provide written
acknowledgment to the borrower and the private lender of its
qualification for an automatic lien accommodation. Upon receipt of the
acknowledgment, the borrower may execute the private lender notes.
(h) Supplemental mortgage. If the private lender determines that a
supplemental mortgage is required to secure the private lender notes on
a pari passu or pro-rata basis with all other notes secured under the
Government mortgage, the private lender may prepare the supplemental
mortgage using the form attached as Appendix F to this subpart or the
borrower may request RUS to prepare such supplemental mortgage in
accordance with the following procedures:
(1) The private lender preparing the supplemental mortgage shall
execute and forward the completed document to RUS. Upon ascertaining
the correctness of the form and the information concerning RUS, RUS
will execute and forward the supplemental mortgage to the borrower.
(2) When requested by the borrower, RUS will expeditiously prepare
the supplemental mortgage, using the form in Appendix F to this
subpart, upon submission by the private lender of:
(i) The name of the private lender;
(ii) The Property Schedule for inclusion as supplemental mortgage
Schedule B, containing legally sufficient description of all real
property owned by the borrower; and
(iii) The amount of the private lender note.
(3) The government is not responsible for ensuring that the
supplemental mortgage has been executed by all parties and is a valid
and binding instrument enforceable in accordance with its terms, and
recorded and filed in accordance with applicable law. If the private
lender determines that additional security instruments or other
documents are required or that RUS must take additional actions to
secure the private lender notes under the mortgage, the private lender
shall follow the procedures established in Secs. 1744.40 or 1744.50, as
appropriate. Except for the actions of the government expressly
established in Sec. 1744.40, the government undertakes no obligation to
effectuate an automatic lien accommodation. When processing of the
supplemental mortgage has been completed to the satisfaction of the
private lender, the borrower shall provide RUS with the following:
(i) A fully executed counterpart of the supplemental mortgage,
including all signatures, seals, and acknowledgements; and
(ii) Copies of all opinions rendered by borrower's counsel to the
private lender.
(i) Other approvals. (1) The borrower is responsible for meeting
all
[[Page 41763]]
requirements necessary to issue private lender notes and to accommodate
the lien of the Government mortgage to secure the private lender notes
including, but not limited to, those of the private lender, of any
other mortgagees secured under the existing RUS mortgage, and of any
governmental entities with jurisdiction over the issuance of notes or
the execution and delivery of the supplemental mortgage.
(2) To the extent that the borrower's existing mortgage requires
RUS approval before the borrower can make an investment in an
affiliated company, approval is hereby given for all investments made
in affiliated companies with the proceeds of private lender notes
qualifying for an automatic lien accommodation under paragraph (e) of
this section. Any reference to an approval by RUS under the mortgage
shall apply only to the rights of RUS and not to any other party.
5. Revise newly redesignated Sec. 1744.50(a)(3), to read as
follows:
Sec. 1744.50 Non-Act purposes.
(a) * * *
(3) Approval of the request is in the interests of the Government
with respect to the financial soundness of the borrower and other
matters, such as assuring that the borrower's system is constructed
cost-effectively using sound engineering practices.
6. In newly redesignated Sec. 1744.55, revise paragraph (a), remove
paragraph (b)(5), and redesignate paragraph (b)(6) as paragraph (b)(5),
to read as follows:
Sec. 1744.55 Application procedures.
(a) Requests for information regarding applications for lien
accommodations or subordination under this part should be addressed to
the Assistant Administrator, Telecommunications Program, Rural
Utilities Service, Washington, DC 20250-1590.
* * * * *
7. Appendices A, B, C, D, E, and F are added to subpart B to read
as follows:
BILLING CODE 3410-15-P
[[Page 41764]]
Appendix A to Subpart B of Part 1744--Statement, Certification, and
Agreement of Borrower's President of Board of Directors Regarding
Refinancing and Refunding Notes Pursuant to 7 CFR 1744.30(c)
[GRAPHIC] [TIFF OMITTED] TR09AU01.026
[[Page 41765]]
Appendix B to Subpart B of Part 1744--Certification of Independent
Certified Public Accountant Regarding Notes To Be Issued Pursuant
to 7 CFR 1744.30(c)
[GRAPHIC] [TIFF OMITTED] TR09AU01.027
[[Page 41766]]
Appendix C to Subpart B of Part 1744--Statement, Certification, and
Agreement of Borrower's President of Board of Directors Regarding
Notes To Be Issued Pursuant to 7 CFR 1744.30(d)
[GRAPHIC] [TIFF OMITTED] TR09AU01.028
[[Page 41767]]
Appendix D to Subpart B of Part 1744--Certification of Independent
Certified Public Accountant Regarding Notes To Be Issued Pursuant
to 7 CFR 1744.30
[GRAPHIC] [TIFF OMITTED] TR09AU01.029
[[Page 41768]]
Appendix E to Subpart B of Part 1744--Statement, Certification, and
Agreement of Borrower's President of Board of Directors Regarding
Notes To Be Issued Pursuant to 7 CFR 1744.30(e)
[GRAPHIC] [TIFF OMITTED] TR09AU01.030
[[Page 41769]]
[GRAPHIC] [TIFF OMITTED] TR09AU01.031
[[Page 41770]]
Appendix F to Subpart B of Part 1744--Form of Supplemental Mortgage
[GRAPHIC] [TIFF OMITTED] TR09AU01.032
[[Page 41771]]
[GRAPHIC] [TIFF OMITTED] TR09AU01.033
[[Page 41772]]
[GRAPHIC] [TIFF OMITTED] TR09AU01.034
Dated: August 6, 2001.
Blaine D. Stockton,
Acting Administrator, Rural Utilities Service.
[FR Doc. 01-19981 Filed 8-8-01; 8:45 am]
BILLING CODE 3410-15-C