[Federal Register Volume 71, Number 110 (Thursday, June 8, 2006)]
[Rules and Regulations]
[Pages 33181-33190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-8891]


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DEPARTMENT OF AGRICULTURE

Rural Business-Cooperative Service

7 CFR Parts 1980 and 4279

RIN 0570-AA49


Business and Industry Guaranteed Loans--Tangible Balance Sheet 
Equity

AGENCY: Rural Business-Cooperative Service, USDA.

ACTION: Final rule.

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SUMMARY: In this final rule the Rural Business-Cooperative Service (the 
Agency) amends existing regulations relating to Business and Industry 
(B&I) loans made or guaranteed by the Agency by modifying the 
provisions that address the evaluation of credit quality. Changes to 
these underwriting provisions were originally proposed on January 16, 
2004. The scope of this final rule is more limited than originally 
proposed but also implements a change not originally discussed in the 
proposed rule. Specifically, in the case of the refinancing of USDA or 
other Federal agency debt only, the Agency is modifying the definition 
of tangible balance sheet equity to include the off balance sheet value 
of tangible assets to the extent of the difference between the 
depreciated book value of real property assets and their current market 
value supported by an appraisal or the original book value, whichever 
is less. In these limited cases, the adjusted tangible balance sheet 
equity will also include qualified subordinated debt owed to the owner. 
As stated above, these adjustments to the equity calculation will apply 
only in cases where the Agency is asked to guarantee a refinancing of 
outstanding debt currently owed to or guaranteed by a Federal agency, 
including the Small Business Administration. The intended effect of 
this action is to facilitate Agency guarantees of certain refinancing 
loans that otherwise would not meet the equity requirements because the 
financial statements prepared in accordance with generally accepted 
accounting principles do not reflect the current market value of real 
property assets owned by the borrower. In the case of all direct or 
guaranteed loan applications, the tangible net equity calculation may 
include a restricted universe of qualified intellectual property. The 
Agency is also increasing the equity requirements applicable to energy 
businesses.

EFFECTIVE DATE: July 10, 2006.

FOR FURTHER INFORMATION CONTACT: Fred Kieferle, Rural Business-
Cooperative Service, USDA, Stop 3224, Room 6845, 1400 Independence 
Ave., SW., Washington, DC 20250-3224, Telephone (202) 720-7818, Fax 
(202) 720-6003, or E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be not significant for 
purposes of Executive Order (E.O.) 12866 and, therefore, has not been 
reviewed by the Office of Management and Budget.

Programs Affected

    The Catalog of Federal Domestic Assistance Program number assigned 
to the applicable programs is 10.768, Business and Industry Loans.

Program Administration

    These programs are administered through the Business and Industry 
Division of the Rural Business-Cooperative Service within the Rural 
Development mission area of USDA and delivered via the USDA Rural 
Development State Directors.

Executive Order 12372

    As stated in the Notice related to 7 CFR part 3015, subpart V, the 
programs and activities within this rule are subject to E.O. 12372 
which requires intergovernmental consultation in the manner delineated 
in 7 CFR part 3015, subpart V. Accordingly, agency personnel advise all 
prospective applicants of whether their state has elected to 
participate in the consultation process by designating a single point 
of contact and name of that contact point.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, the 
information collection requirements contained in this regulation have 
been approved by OMB under control numbers 0570-0014 and 0570-0017.

Government Paperwork Elimination Act

    The Agency is committed to compliance with the Government Paperwork 
Elimination Act, which requires Government agencies, in general, to 
provide the public the option of submitting information or transacting 
business electronically to the maximum extent possible.

Environmental Impact Statement

    It is the determination of the Agency that this action is not a 
major Federal action significantly affecting the environment. 
Therefore, in accordance with the National Environmental Policy Act of 
1969, an Environmental Impact Statement is not required.

Executive Order 12988

    This final rule has been reviewed in accordance with E.O. 12988, 
Civil Justice Reform. In accordance with this rule: (1) All state and 
local laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) administrative proceedings in accordance with 7 CFR part 11 must be 
exhausted before bringing suit in court challenging action taken under 
this rule unless those regulations specifically allow bringing suit at 
an earlier time.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory actions on state, local, and tribal governments and 
the private sector. Under section 202 of the UMRA, USDA must prepare a 
written statement, including a cost benefit analysis, for proposed and 
final rules with ``Federal mandates'' that may result in expenditures 
to state, local or tribal governments, in the aggregate, or to the 
private sector, of $100 million or more in any one year. When such a 
statement is needed for a rule, section 205 of UMRA generally requires 
USDA to identify and consider a reasonable number of regulatory 
alternatives and adopt the least costly, more cost effective or least 
burdensome alternative that achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of title II of the UMRA) for state, local, and tribal 
governments or the private sector. Therefore this rule is not subject 
to the requirements of sections 202 and 205 of UMRA.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the undersigned has determined and certified by signature of this 
document

[[Page 33182]]

that this rule will not have a significant economic impact on a 
substantial number of small entities. Some provisions published as a 
part of this rule are, in fact, a benefit to small entities.
    The modified equity test in the case of refinancing applies equally 
to large and small entities, but in practice, the Agency expects it to 
benefit smaller entities disproportionately more than larger 
businesses. In the Agency's experience, the largest single component of 
off balance sheet value in a small firm is the real property it owns. 
Small firms that are real property rich, but cash flow constrained, may 
find this change to be the only means to achieve flexibility in 
refinancing, while larger businesses may have other ways, i.e., other 
assets to work with, to achieve the same result. The scope of the final 
rule is such that a larger number of small firms, particularly those 
with loans guaranteed by the Small Business Administration, may be 
expected to benefit. To the extent that any business has qualified 
intellectual property, the benefits of the change proposed for 
qualified intellectual apply across the board, and as such is estimated 
to have no disproportionate impact, positive or negative, accruing to 
one size of business or another.
    The change in equity requirements for energy loans may make it more 
difficult for small firms to qualify. The energy business is a capital 
intensive business and the corresponding risk is greater when it is 
undertaken by undercapitalized firms. It may be more difficult for 
small firms to raise the necessary equity for one project, whereas a 
larger business can spread the risk across more than one project.
    The net effect of this rulemaking is expected to be neutral in its 
overall impact on smaller firms. Accordingly, a regulatory flexibility 
analysis was not performed.

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose substantial direct compliance costs on state and local 
governments. This rule is intended to foster cooperation between the 
Federal Government and the states and local governments, and reduces, 
where possible, any regulatory burden imposed by the Federal Government 
that impedes the ability of states and local governments to solve 
pressing economic, social and physical problems in their state.

I. Background

    The current loan processing regulations for the B&I Guaranteed Loan 
Program provide that the lender is primarily responsible for 
determining credit quality and must address all of the elements of 
credit quality in a written credit analysis. The Agency assumes this 
responsibility for the B&I Direct Loan Program. One of the elements of 
credit quality required in the regulation is that borrowers demonstrate 
a minimum level of tangible balance sheet equity. The threshold level 
of required tangible balance sheet equity is higher for new businesses 
than for existing businesses.
    Conventional accounting policies and procedures provide for a 
distinction between tangible and intangible assets. The net equity on a 
balance sheet reflects the net book value of all assets, after 
depreciation, less total liabilities. The current regulations take a 
conservative approach in evaluating the equity component of a balance 
sheet, specifying that acceptable equity for credit quality purposes be 
restricted to tangible balance sheet equity, as defined in the 
regulation.
    Where the accounting terms used in the regulation coincide with 
terms used in generally accepted accounting principles (GAAP),\1\ the 
GAAP definitions are presumed in the regulation. Tangible balance sheet 
equity is not a term used in GAAP; there is no commonly held 
definition. It is perhaps more accurate to call it an artificial 
construct than a term. It is nevertheless a concept familiar to many 
financial analysts and regulators who craft customized definitions, 
tailored to a specific industry or application, using the commonly 
understood terms found in GAAP as the basic building blocks.\2\ In this 
final rule, the Agency has elected to allow some credit for off balance 
sheet appreciation in real property as well as certain subordinated 
debt in this agency-defined formula for tangible balance sheet equity. 
This final rule provides that a restricted universe of intellectual 
property assets may be included in this adjusted equity calculation as 
well. Whereas the real property asset appreciation and subordinated 
owner debt provisions will apply only in the case of refinancing loans, 
the adjustment for qualified intellectual property assets will apply in 
the case of all applications.
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    \1\ The meaning of the term generally accepted accounting 
principles (GAAP) has evolved over time. It used to refer to widely 
used, but un-codified, accounting policies and procedures. With 
time, standard-setting bodies and professional organizations came 
into being and became more involved in recommending preferred 
practices by means of issued pronouncements. Over the past fifty 
years, principles were promulgated by different groups, some of 
which were no longer in existence, and some conflicts exist between 
the various pronouncements. The American Institute of Certified 
Public Accountants issued a statement of auditing standards (SAS-69) 
to better organize and clarify what is meant by GAAP. This statement 
instructs financial statement preparers, auditors and users of 
financial statements concerning the relative priority of the 
different sources of GAAP (past and present pronouncements by the 
many standard-setting entities) used by auditors to judge the 
fairness of presentation in financial statements.
    \2\ See, for example, Cal. Admin. Code title 28, section 
1300.76, where the state requires licensed health care service plans 
to maintain a minimum tangible net equity and another, Federal, 
example at 12 CFR 208.41 where tangible net equity is incorporated 
into the capital adequacy requirements required of state chartered 
banks that are members of the Federal Reserve system.
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    Tangible balance sheet equity is a refinement of the GAAP concept 
of equity, typically arrived at by reducing balance sheet equity by the 
book value assigned to intangible assets, including but not limited to 
assets such as goodwill, going concern value, organizational start up 
expenses, etc. These items are recognized as capital assets for 
purposes of GAAP but may or may not be assets that can be readily 
liquidated or pledged as security for loans.
    The modification proposed in this rulemaking acknowledges that the 
market value of real property assets may increase at the same time the 
net book value of such assets decrease. The net book value of real 
property usually decreases over time due to depreciation, whereas the 
market value of real property may stay the same or appreciate over 
time.
    In a lower interest rate environment, refinancing is a reasonable 
business strategy. The current regulation, however, does not 
contemplate that any credit can be given for a positive difference 
between net book value and market value for purposes of evaluating the 
equity component of credit worthiness when a borrower seeks Agency-
guaranteed refinancing at a lower interest rate. It has happened that 
borrowers that could have met a modified balance sheet equity test have 
been foreclosed from this option because the equity ratio calculated 
using the conventional GAAP values reported on the balance sheet do not 
meet the equity test in the current regulation at the time the 
refinancing is of interest to the borrower. When this happens, the 
borrower is tied to the existing lender that is the beneficiary of the 
original Agency guarantee on what has become

[[Page 33183]]

an above market rate loan. This lender has minimal incentive to 
refinance the above market rate loan, and unless the Agency can 
guarantee another lender willing to refinance the first lender's 
exposure, the borrower is locked into the higher interest rate. It is 
not able to ``shop'' for a lower interest rate. When the loan in 
question is already guaranteed by a Federal agency, the taxpayer is in 
a position of guaranteeing the higher interest rate when a lower 
exposure could otherwise be affected and there is a corresponding 
increased risk of default under the guarantee. The increased risk of 
default comes about when these higher interest rates undermine the 
financial health of the borrowers and lead to what otherwise could be 
avoidable financial defaults.
    This final rule provides refinancing flexibility to borrowers with 
Federal direct or Federally guaranteed debt when the market value of 
the real property on the balance sheet justifies a more flexible 
approach to the equity requirement than is allowed by the current 
regulation. The definition of a refinancing loan in this rule provides 
that all of the proceeds must be used to extinguish pre-existing debt. 
Accordingly, the amount of the refinancing loan may not exceed the 
outstanding balance of the loan(s) to be refinanced. Where a 
refinancing request is coupled with a ``new money'' guarantee 
application, the conventional, unadjusted, tangible balance sheet 
equity test will be applied to the combined guarantee request. The 
modified equity calculation does not apply to all refinancing requests, 
only those pertaining to debt that is directly owed to a Federal agency 
or guaranteed by a Federal agency. This limitation is primarily due to 
policy considerations relating to the relative economic impact of 
refinancing actions versus new loans and how the Agency's use of its 
obligational authority is accounted for as a result of the Federal 
Credit Reform Act of 1990 (Pub. L. 101-508). Further elaboration on 
this may be found in the comments section of this preamble wherein the 
modified tangible balance sheet equity calculation is discussed at 
greater length.
    In order to provide for an alternate equity calculation in 
determining whether the credit requirement is met for refinancing 
loans, the Agency has modified existing regulations to define 
``tangible balance sheet equity'' and added two new definitions that 
build directly and indirectly on this term--``adjusted tangible net 
worth'' and ``allowed tangible asset appreciation.'' The term 
``subordinated owner debt'' is also added. These new terms apply only 
in the case of refinancing requests. ``Subordinated owner debt'' is 
defined as subordinated debt owed to one or more of the owners of the 
borrower.
    An example that demonstrates the practical effect of this change is 
as follows. XYZ Company is capitalized with $200,000 cash on day 1 and 
uses $200,000 cash and $800,000 Agency guaranteed debt to purchase a 
building for $1,000,000 on day 2. Assume (1) the building is 
depreciated at 10 percent a year, (2) the market value of the building 
at the end of year 2 has appreciated to $1,200,000, (3) there are no 
other assets on the balance sheet at the end of year 2 for purposes of 
this simplified example, (4) the mortgage does not begin to amortize 
until the end of year 4, and (5) the income statement reflects a 
cumulative net loss of ($200,000) for the first two years of 
operations. At the end of year 2 the company would like to refinance 
the mortgage debt. Under the existing regulation, at this point in time 
tangible balance sheet equity is $ -0-. Per the revised regulation, 
however, the tangible balance sheet can be adjusted upwards by an 
increment equal to the difference between the net book value of the 
property ($800,000) and the lesser of (1) its original book value 
($1,000,000) or (2) an appraisal supported current market value 
($1,200,000). Thus, the adjusted tangible balance sheet equity in that 
case would be $-0-plus $200,000, or $200,000 for purposes of 
determining eligibility for a refinancing loan guarantee. In order to 
calculate the equity ratio, (equity as a percentage of equity plus 
total liabilities), the result would be 200,000/1,000,000, or 20 
percent.
    A second refinement to the GAAP concept of equity in this 
rulemaking for this credit evaluation criterion is to include in the 
equity calculation subordinated debt contributed to the borrower by the 
business owner(s). In order for this subordinated debt to count as 
equity for purposes of the equity criterion, the subordinated note must 
be expressly subordinate to the Agency's B&I loan exposure, whether 
that exposure is direct or guaranteed. Moreover, the loan documentation 
must provide that repayment of this subordinated debt may not commence 
until the earlier of the full repayment of the B&I loan exposure or 
when a period of three consecutive years has passed during which the 
borrower has met all loan covenants and evidenced operating profit 
sufficient to commence partial repayment of this subordinated debt 
after giving effect to the annual debt service requirements of the B&I 
loan exposure. The partial repayment schedule in the case of the latter 
scenario may not be more accelerated than the debt repayment schedule 
in effect for the Agency's B&I loan exposure.
    To carry our earlier example one step further, assume (1) that an 
owner provides $100,000 of subordinated debt to XYZ Company in year 3 
so that it can purchase a patent. Also assume (2) the market value of 
the building at the end of year 3 remains at $1,200,000, (3) there are 
no other assets on the balance sheet at the end of year 3 for purposes 
of this simplified example, and (4) the income statement reflects a 
cumulative net loss of ($300,000) for the first three years of 
operations. Instead of refinancing at the end of year two as described 
above, the Company seeks a refinancing loan guarantee at the end of 
year three. Total liabilities equal the $800,000 mortgage debt plus 
$100,000 in subordinated owner debt. Tangible balance sheet equity as 
defined in the current rule equals total equity less the book value of 
intangible assets, or ($100,000) minus $100,000 = ($200,000). Per the 
revised regulation, however, the tangible balance sheet equity can be 
adjusted upwards by an increment equal to the difference between the 
net book value of the property ($700,000) and the lesser of (1) its 
original book value ($1,000,000) or (2) an appraisal supported current 
market value ($1,200,000). Thus, the adjusted tangible balance sheet 
equity in that case would be ($200,000) plus $300,000, or $100,000 for 
purposes of determining eligibility for a refinancing loan guarantee. 
In order to calculate the equity ratio, (equity as a percentage of 
equity plus total liabilities), the result would be 100,000/1,000,000, 
or 10 percent. Assuming the 10 percent equity requirement for existing 
businesses would apply and this borrower would qualify for a 
refinancing loan as a result of this regulatory change, then the income 
statement shows three years of consecutive accrual losses, but 
breakeven cash flows.
    In this final rule, the Agency has also elected upon consideration 
to include another refinement of the tangible balance sheet equity 
computation, applicable to all applications, not just refinancing 
loans, whereby qualified intellectual property may count as well. 
Intellectual property falls within the definition of intangible assets, 
and as such, would not ordinarily be included in a conventional 
tangible balance sheet equity computation. But this formula is subject 
to Agency definition in the final analysis, and the Agency has elected 
to recognize that the liquidity arguments for tangible assets that gave 
rise to the development of the adjusted equity

[[Page 33184]]

calculation in the first place, may also apply to a restricted universe 
of qualified intellectual property as well. In modern rural businesses, 
credit should be given for these reasonably liquid intangible assets in 
the adjusted equity calculation.
    The narrow universe of qualified intellectual property that will 
count as equity under the adjusted computation consists of trademarks, 
patents or copyrights that are included on current (within one year) 
audited balance sheets, for which an audit opinion has been received 
that states the financial reports fairly represent the values therein, 
and the value of which has been arrived at in accordance with GAAP 
standards for valuing intellectual property. Also, the work papers 
supporting this valuation of intellectual property must be satisfactory 
to the Administrator in order for the asset to be considered qualified 
for this purpose.
    This final rule also increases the equity requirement for certain 
energy projects and provides that financing will be guaranteed for 
energy projects only when they have met certain performance criteria. 
Financing for energy projects will only be allowed when the facility 
has been constructed according to plans and specifications and is 
producing at the design levels projected in the application for 
purposes of underwriting the loan or loan guarantee. Based on comments 
received, the Agency slightly lowered the equity requirements for 
energy loans, but continued to require higher equity levels than other 
industries. The higher equity requirements reflect the Agency's 
determination that energy projects are riskier than the average B&I 
portfolio loan and an intent to apply equity criteria that more closely 
conform to conventional lender practice. The Agency's energy borrowers 
are typically not utilities in the conventional sense. As a general 
rule, conventional utilities have other sources of financing and higher 
capital requirements than can practicably be met by Agency programs.
    The final rule requires that energy projects must demonstrate two 
complete operating cycles at design performance levels projected in the 
application. A complete operating cycle consists of the purchase of raw 
material inputs, their input into the manufacturing process and 
transformation into a design specified number of output units for a 
given level of raw material input within a specified period of time and 
at a design-specified quality level. In the case of projects that 
produce steam or electricity as an output, there is an additional 
requirement that they be successfully interconnected with the purchaser 
of the output. This is not the same as being connected to the power 
grid alone. Being connected to the grid, without enforceable wheeling 
agreements and physical interconnection with the buyer at the other end 
of the transmission route, does not satisfy this requirement. 
Successful interconnection with the purchaser of the steam or 
electricity means that everything is in place that is required for the 
purchaser to receive the steam or electricity output in accordance with 
the contractual terms specified and such delivery by the seller and 
acceptance by the purchaser has been demonstrated.
    The Agency revised the definition for energy projects to include 
both `power' and `energy.' The term `power plant' is commonly used to 
describe a facility that uses fuels to produce electricity or high 
pressure steam. In these type plants, power and energy are 
intrinsically related. The change in definition makes it clear that 
electric or steam facilities are also considered ``energy projects,'' 
as are facilities that produce fuels such as ethanol or biodiesel. The 
Agency also decided to narrow the scope of energy projects that require 
increased equity by removing the production of batteries and fuel cells 
from the definition based on comments received.

II. Comments on the Proposed Rule and Responses

    The following paragraphs summarize the comments received and the 
Agency responses. We received 15 responses of which, one is from an 
elected state official, six are from borrowers or borrower 
representatives (a producer association, business consultants, etc.), 
and eight are from the lender community (two of the lender comments are 
from the same bank).

A. Comments on the Modified Tangible Balance Sheet Equity Test

    All comments received regarding the modified tangible balance sheet 
equity requirement were positive. Eight of the comments claimed we did 
not go far enough; they urged that the new equity test be applied to 
new loan guarantee requests as well.
    The most significant change in this final rule from the proposed 
rulemaking is the result of additional deliberation within the Agency. 
The proposed regulatory text applied to the refinancing of any loan, 
whether or not it is currently USDA guaranteed. Upon further 
reflection, concern developed with respect to the risk that an existing 
lender, not presently guaranteed by USDA, can get the equivalent of a 
``bailout'' if the more flexible equity test is applied. There is also 
sensitivity within USDA as to the proportion of obligational authority 
used for refinancing. It is true that if USDA issues a guarantee to 
Lender A for a loan, the proceeds of which pay off a USDA guaranteed 
loan held by Lender B, there is no increase in risk or exposure to the 
taxpayer. However (and this may not be fully realized or appreciated by 
the private sector community), under federal budget rules, in this 
circumstance the Agency's available obligational authority is reduced 
as if a new loan guarantee had been issued to Lender A. A refinancing 
action is scored against the Agency's budget the same as a new loan 
action, even though the net incremental risk to the taxpayer differs 
significantly as between the two scenarios.
    The Agency must concern itself with maximizing the economic benefit 
that can be achieved in rural America with limited Federal funding and 
recognize that net new capital invested in rural America has a greater 
economic impact than the incremental cash flow improvements associated 
with refinancing loan guarantees.
    We ultimately believe that a policy of conforming the modified 
equity test to recognize off balance sheet values inherent in the 
appreciation of real property is rooted in common sense. However, the 
expectation is that this rule could well result in a situation where 
the Agency is presented with a significant increase in the proportion 
of refinancing requests relative to new loan requests, with a 
concomitant reduction in the net economic benefit per dollar of budget 
authority. Therefore, this final rule does not expand the scope of the 
tangible balance sheet equity test beyond direct Federal debt and 
Federally guaranteed debt. It does not go as far as many of those 
providing comments would have wished, but it reflects a balanced 
approach to the issue in the current budget environment.
    As explained in the preamble to the proposed rule, the Agency 
considered, but elected not to propose, revising the tangible balance 
sheet equity test to apply across the board, for all borrowers, and not 
restrict its availability to refinancing loan applications. It may be 
that the Agency's experience with the limited applicability of this 
rulemaking will lead to proposing its wider application in the future. 
For now, it was determined to proceed with a more limited applicability 
in order to bring relief to at least some borrowers in a more rapid 
period of time. The final rule

[[Page 33185]]

is narrower in scope than was the proposed rule. The proposed rule 
applied the modified equity calculation to all refinancing loans; the 
final rule limits its application to the refinancing of debt owed to a 
Federal agency.
    The Agency also considered allowing full market value refinancing 
in the proposed rulemaking. The potential for abuse of market 
appraisals for purposes of full market value refinancing is thought to 
be greater than the potential benefit of liberalizing the related 
equity criterion to this maximum degree. In the alternative, the Agency 
has opted to allow consideration of market value only with respect to 
the equity test calculation; the amount of the refinancing loan itself 
may not exceed the outstanding balance of the loan to be refinanced. 
Market value must be determined by appraisals using arms-length 
methodologies to arrive at an unbiased ``fair or current market 
value.''
    Allowing flexibility in the equity requirement for refinancing 
loans where the market value of real property assets supports such 
flexibility will serve to enhance the financial health of Agency-
guaranteed borrowers and promote rural development.

B. Comments on the Modified Equity Requirement for Energy Projects

    Seven of the 15 comments addressed the increased equity 
requirements proposed for energy loans--all were critical, arguing that 
the equity requirement should be no different than for other types of 
businesses. One argued for preferential treatment for non profit 
borrowers. One lender, while critical of the differentiated equity 
requirement, nevertheless observed that the requirement that energy 
projects demonstrate two complete operating cycles would ``weed out'' 
bad projects. A commodity producer association pointed out that many 
private sector lenders require 50 percent equity, and if the Agency 
implements the modifications the Business and Industry program will 
offer very little advantage over private lender options already 
available for producer owned businesses.
    We expect that most of the energy loan applications will continue 
to be for ethanol or similar projects. The Agency's experience in 
lending for ethanol projects from the mid 1970s to 1990 was not good. 
This was due to the combined factors of weak underwriting criteria, 
underdeveloped technologies and inexperienced managers. As of 1990, 
credit criteria were tightened up and the technology has developed to 
the point where it is now commercially proven. The Agency is somewhat 
conforming its equity requirement to those found in the private sector 
inasmuch as the technology is now quite established and needs less 
support. Agency-guaranteed loans will still enjoy a better interest 
rate and the available term may be advantageous when compared to the 
non-guaranteed private sector alternative.
    As for energy projects that are not ethanol or biodiesel, we 
observe that many renewable energy projects find it difficult to 
impossible to obtain private sector financing even when project equity 
ratios are high. Thus, while the equity ratios implemented for energy 
projects are higher than the requirements for other industries, we 
believe that Agency financing under those circumstances nevertheless 
represents a source of capital often unavailable for these technologies 
elsewhere. The higher equity ratios strike a balance between no capital 
available at all and the risk to the taxpayer in providing support for 
renewable energy projects. However, in response to these comments, the 
Agency modified the equity requirement for energy projects, but still 
will require higher equity levels than other industries.
    Several comments observe that project risks can be mitigated by 
means other than increased equity. The following examples of possible 
risk mitigation vehicles were suggested: a strong contract for the 
purchase of the output (off take agreement), the use of established 
technologies, or performance guarantees combined with surety bonds to 
mitigate construction risk. All of these address a particular kind of 
risk--either the project doesn't get built, it doesn't operate as 
expected or the market for the output doesn't materialize at the price 
forecast. These vehicles are all worthwhile underwriting tools, but 
only increased equity protects against unforeseen risks. The lower the 
debt burden on a project, the more likely the project will be able to 
surmount any of these risks and pay off the debt as and when due. With 
respect to off take agreements in particular, if the projected cash 
flow stream associated with the off take agreement is strong, it will 
cover both debt service and an equity return. If the imputed equity 
return is sufficient, this should be attractive to third party 
investors such that the equity requirement can be met. If the off take 
agreement is not sufficient for this, it cannot be said that it is a 
substitute for increased equity.

List of Subjects

7 CFR Part 1980

    Loan programs--Business and industry--Rural development assistance, 
Rural areas.

7 CFR Part 4279

    Loan programs--Business and industry--Rural development assistance, 
Rural areas.

0
Accordingly, Chapters XVIII and XLII, title 7, of the Code of Federal 
Regulations are amended as follows:

CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE 
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT 
OF AGRICULTURE

PART 1980--GENERAL

0
1. The authority citation for part 1980 is revised to read as follows:

    Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.
    Subpart E also issued under 7 U.S.C. 1932(a).

Subpart E--Business and Industrial Loan Program

0
2. Section 1980.402 is revised to read as follows:


Sec.  1980.402  Definitions.

    (a) The following general definitions are applicable to the terms 
used in this subpart. Adjusted tangible net worth. Tangible balance 
sheet equity plus allowed tangible asset appreciation and subordinated 
owner debt.
    Allowed tangible asset appreciation. The difference between the 
current net book value recorded on the financial statements (original 
cost less cumulative depreciation) of real property assets and the 
lesser of their current market value or original cost, where current 
market value is determined using an appraisal satisfactory to the 
Agency.
    Area of high unemployment. An area in which a B&I loan guarantee 
can be issued, consisting of a county or group of contiguous counties 
or equivalent subdivisions of a State which, on the basis of the most 
recent 12-month average or the most recent annual average data, has a 
rate of unemployment 150 percent or more of the national rate. Data 
used must be those published by the Bureau of Labor Statistics, U.S. 
Department of Labor.
    Biogas. Biomass converted to gaseous fuel.
    Biomass. Any organic material that is available on a renewable or 
recurring basis including agricultural crops, trees grown for energy 
production, wood waste and wood residues, plants, including aquatic 
plants and grasses,

[[Page 33186]]

fibers, animal waste and other waste materials, fats, oils, greases, 
including recycled fats, oils and greases. It does not include paper 
that is commonly recycled or unsegregated solid waste.
    Borrower. A borrower may be a cooperative organization, 
corporation, partnership, trust or other legal entity organized and 
operated on a profit or nonprofit basis; an Indian Tribe on a Federal 
or State reservation or other Federally recognized tribal group; a 
municipality, county or other political subdivision of a State; or an 
individual. Such borrower must be engaged in or proposing to engage in 
improving, developing or financing business, industry and employment 
and improving the economic and environmental climate in rural areas, 
including pollution abatement and control.
    Business and Industry Disaster Loans. Business and Industry loans 
guaranteed under the authority of the Dire Emergency Supplemental 
Appropriations Act, 1992, Public Law 102-368. These guaranteed loans 
cover costs arising from the direct consequences of natural disasters 
such as Hurricanes Andrew and Iniki and Typhoon Omar that occur after 
August 23, 1992, and receive a Presidential declaration. Also included 
are the costs to any producer of crops and livestock that are a direct 
consequence of at least a 40 percent loss to a crop, 25 percent loss to 
livestock, or damage to building structures from a microburst wind 
occurrence in calendar year 1992.
    Commercially available. Energy projects utilizing technology that 
has a proven operating history, and for which there is an established 
industry for the design, installation, and service (including spare 
parts) of the equipment.
    Community facilities. For the purposes of this subpart, community 
facilities are those facilities designed to aid in the development of 
private business and industry in rural areas. Such facilities include, 
but are not limited to, acquisition and site preparation of land for 
industrial sites (but not for improvements erected thereon), access 
streets and roads serving the site, parking areas extension or 
improvement of community transportation systems serving the site and 
utility extensions all incidental to site preparation. Projects 
eligible for assistance under Subpart A of Part 1942 of this chapter 
are not eligible for assistance under this subpart.
    Development cost. These costs include, but are not limited to, 
those for acquisition, planning, construction, repair or enlargement of 
the proposed facility; purchase of buildings, machinery, equipment, 
land easements, rights of way; payment of startup operating costs, and 
interest during the period before the first principal payment becomes 
due, including interest on interim financing.
    Disaster Assistance for Rural Business Enterprises. Guaranteed 
loans authorized by section 401 of the Disaster Assistance Act of 1989 
(Pub. L. 101-82), providing for the guarantee of loans to assist in 
alleviating distress caused to rural business entities, directly or 
indirectly, by drought, freeze, storm, excessive moisture, earthquake, 
or related conditions occurring in 1988 or 1989, and providing for the 
guarantee of loans to such rural business entities that refinance or 
restructure debt as a result of losses incurred, directly or 
indirectly, because of such natural disasters. See this subpart and its 
appendices, especially Appendix K, containing additional regulations 
for these loans.
    Drought and Disaster Guaranteed Loans. Guaranteed loans authorized 
by section 331 of the Disaster Assistance Act of 1988 (Pub. L. 100-
387), providing for the guarantee of loans to assist in alleviating 
distress caused to rural business entities, directly or indirectly, by 
drought, hail, excessive moisture, or related conditions occurring in 
1988, and providing for the guarantee of loans to such rural business 
entities that refinance or restructure debt as a result of losses 
incurred, directly or indirectly, because of such natural disasters.
    Energy projects. Commercially available projects that produce or 
distribute energy or power and/or projects that produce biomass or 
biogas fuel.
    Farmers Home Administration (FmHA). The former agency of USDA that 
previously administered the programs of this Agency. Many Instructions 
and forms of FmHA are still applicable to Agency programs.
    Hurricane Andrew. A hurricane that caused damage in southern 
Florida on August 24, 1992, and in Louisiana on August 26, 1992.
    Hurricane Iniki. A hurricane that caused damage in Hawaii on 
September 11, 1992.
    Letter of conditions. Letter issued by Rural Development under 
Public Law 103-354 to a borrower setting forth the conditions under 
which Rural Development will make a direct (insured) loan from the 
Rural Development Insurance Fund.
    Loan classification system. The process by which loans are examined 
and categorized by degree of potential for loss in the event of 
default.
    Microburst wind. A violently descending column of air associated 
with a thunderstorm which causes straight-line wind damage.
    Problem loan. A loan which is not performing according to its 
original terms and conditions or which is not expected in the future to 
perform according to those terms and conditions.
    Public body. A municipality, political subdivision, public 
authority, district, or similar organization.
    Qualified Intellectual Property. Trademarks, patents or copyrights 
included on current (within one year) audited balance sheets for which 
an audit opinion has been received that states the financial reports 
fairly represent the values therein and the reported value has been 
arrived at in accordance with GAAP standards for valuing intellectual 
property. The supporting work papers must be satisfactory to the 
Administrator.
    Refinancing loan. A loan, all of the proceeds of which are applied 
to extinguish the entire balance of an outstanding debt.
    Seasoned loan. A loan which:
    (1) Has a remaining principal guaranteed loan balance of two-thirds 
or less of the original aggregate of all existing B&I guaranteed loans 
made to that business.
    (2) Is in compliance with all loan conditions and B&I regulations.
    (3) Has been current on the B&I guaranteed loan(s) payments for 24 
consecutive months.
    (4) Is secured by collateral which is determined to be adequate to 
ensure there will be no loss on the B&I guaranteed loan.
    State. Any of the 50 States, the Commonwealth of Puerto Rico, the 
Virgin Islands of the United States, Guam, American Samoa, the 
Commonwealth of the Northern Mariana Islands, the Republic of Palau, 
the Federated States of Micronesia, and the Republic of the Marshall 
Islands.
    Subordinated owner debt. Debt owed by the borrower to one or more 
of the owner(s) that is subordinated to debt owed by the borrower to 
the Agency or guaranteed by the Agency (aggregate B&I loan exposure) 
pursuant to a subordination agreement satisfactory to the Agency. The 
debt must have been issued in exchange for cash loaned to the borrower 
for the benefit of the borrower's business. The terms of the 
subordination agreement must provide that repayment will not commence 
until the earlier of the date all aggregate B&I loan exposure has been 
repaid or when a period of three consecutive years has passed during 
which the borrower has met all loan covenants and evidenced

[[Page 33187]]

operating profit sufficient to commence partial repayment of this 
subordinated debt after giving effect to the annual debt service 
requirements of the aggregate B&I loan exposure. The partial repayment 
schedule in the case of the latter scenario is subject to annual Agency 
concurrence and may not be more accelerated than the rate of the debt 
repayment schedule in effect for the Agency's aggregate B&I loan 
exposure.
    Tangible balance sheet equity. Total equity less the value of 
intangible assets recorded on the financial statements, as determined 
from balance sheets prepared in accordance with generally accepted 
accounting principles (GAAP), plus qualified intellectual property.
    Typhoon Omar. A typhoon that caused damage in Guam on August 28, 
1992.
    Working capital. The excess of current assets over current 
liabilities. It identifies the relatively liquid portion of total 
enterprise capital which constitutes a margin or buffer for meeting 
obligations within the ordinary operating cycle of the business.
    (b) Accounting terms not otherwise defined in this part shall have 
the definition ascribed to them under generally accepted accounting 
principles (GAAP).

0
3. Section 1980.411 is amended by adding new paragraphs (a)(11)(iv) and 
(a)(11)(v) and by adding a new paragraph (a)(16) to read as follows:


Sec.  1980.411  Loan purposes.

* * * * *
    (a) * * *
    (11) * * *
    (iv) It does not refinance subordinated owner debt; or
    (v) (Except where the amount to be refinanced is owed directly to 
the Federal government or is Federally guaranteed) the amount to be 
refinanced by the Agency is a secondary part (less than 50 percent) of 
the overall loan requested.
* * * * *
    (16) Energy projects. Commercially available energy projects that 
produce biomass fuel or biogas as an output must have completed two 
operating cycles at design performance levels submitted to the Agency. 
Projects that produce steam or electricity as an output must have met 
or exceeded acceptance test performance criteria submitted to the 
Agency and be successfully interconnected with the purchaser of the 
output. Performance or acceptance test requirements for all other 
energy projects will be determined by the Agency on a case by case 
basis. Financing for energy projects will only be allowed when the 
facility has been constructed according to plans and specifications and 
is producing at the quality and quantity projected in the application.
* * * * *

0
4. Section 1980.441 is revised to read as follows:


Sec.  1980.441  Borrower equity requirements.

    (a) A minimum of 10 percent tangible balance sheet equity will be 
required for existing businesses at loan closing. A minimum of 20 
percent tangible balance sheet equity will be required for new 
businesses at loan closing. For energy projects, the minimum tangible 
balance sheet equity requirement range will be between 25 percent and 
40 percent. Criteria for considering the minimum equity required for an 
individual application will be based on: existing businesses with 
successful financial and management history vs. start-up businesses; 
personal/corporate guarantees offered; contractual relationships with 
suppliers and buyers; credit rating; and strength of the business plan/
feasibility study. Where the application is a request to refinance 
outstanding Federal direct or guaranteed loans, without any new 
financing, the equity requirement may be determined using adjusted 
tangible net worth. An application that combines a refinancing loan or 
guarantee request with a new loan or guarantee request is subject to 
the standard, unadjusted, equity requirement except as provided in 
paragraphs (a)(1) or (a)(2) of this section. Increases or decreases in 
the equity requirements may be imposed or granted as follows:
    (1) A reduction in the equity requirement for existing businesses 
may be permitted by the Administrator. In order for a reduction to be 
considered, the borrower must furnish the following:
    (i) Collateralized personal and corporate guarantees, including any 
parent, subsidiary, or affiliated company, when feasible and legally 
permissible, and
    (ii) Pro forma and historical financial statements that indicate 
the business to be financed meets or exceeds the median quartile (as 
identified in the Risk Management Association's Annual Statement 
Studies or similar publication) for the current ratio, quick ratio, 
debt-to-worth ratio, debt coverage ratio, and working capital.
    (2) The approval official may require more than the minimum equity 
requirements provided in this paragraph if the official makes a written 
determination that special circumstances necessitate this course of 
action.
    (b) The equity requirement must be met in the form of either cash 
or tangible earning assets contributed to the business and reflected on 
the balance sheet.
    (c) The equity requirement must be determined using balance sheets 
prepared in accordance with GAAP and met upon giving effect to the 
entirety of the loan in the calculation, whether or not the loan itself 
is fully advanced, as of the date the loan is closed; a certification 
to this effect is required of all guaranteed lenders.
    (d) The modified formula for determining whether the equity 
requirement is met, ``adjusted tangible net worth,'' may be used only 
in cases where the guarantee requested is for a loan, the proceeds of 
which are to be used entirely to refinance a debt owed to the Federal 
government or Federally guaranteed debt. In all other situations, the 
equity requirement must be determined using tangible net worth.

CHAPTER XLII--RURAL BUSINESS-COOPERATIVE SERVICE AND RURAL UTILITIES 
SERVICE, DEPARTMENT OF AGRICULTURE

PART 4279--GUARANTEED LOANMAKING

0
5. The authority citation for part 4279 is revised to read as follows:

    Authority: 5 U.S.C. 301, 7 U.S.C. 1989 and 7 U.S.C. 1932(a).

Subpart A--General

0
6. Section 4279.2 is revised to read as follows:


Sec.  4279.2  Definitions and abbreviations.

    (a) Definitions.
    Adjusted tangible net worth. Tangible balance sheet equity plus 
allowed tangible asset appreciation and subordinated owner debt.
    Agency. The Rural Business-Cooperative Service or successor Agency 
assigned by the Secretary of Agriculture to administer the B&I program. 
References to the National Office, Finance Office, State Office or 
other Agency offices or officials should be read as prefaced by 
``Agency'' or ``Rural Development'' as applicable.
    Allowed tangible asset appreciation. The difference between the 
current net book value recorded on the financial statements (original 
cost less cumulative depreciation) of real property assets and the 
lesser of their current market value or original cost, where current 
market value is determined using an appraisal satisfactory to the 
Agency.

[[Page 33188]]

    Arm's-length transaction. The sale, release, or disposition of 
assets in which the title to the property passes to a ready, willing, 
and able disinterested third party that is not affiliated with or 
related to and has no security, monetary or stockholder interest in the 
borrower or transferor at the time of the transaction.
    Assignment Guarantee Agreement (Business and Industry). Form RD 
4279-6, the signed agreement among the Agency, the lender, and the 
holder containing the terms and conditions of an assignment of a 
guaranteed portion of a loan, using the single note system.
    Biogas. Biomass converted to gaseous fuel.
    Biomass. Any organic material that is available on a renewable or 
recurring basis including agricultural crops, trees grown for energy 
production, wood waste and wood residues, plants, including aquatic 
plants and grasses, fibers, animal waste and other waste materials, 
fats, oils, greases, including recycled fats, oils and greases. It does 
not include paper that is commonly recycled or unsegregated solid 
waste.
    Borrower. All parties liable for the loan except for guarantors.
    Commercially available. Energy projects utilizing technology that 
has a proven operating history, and for which there is an established 
industry for the design, installation, and service (including spare 
parts) of the equipment.
    Conditional Commitment (Business and Industry). Form RD 4279-3, the 
Agency's notice to the lender that the loan guarantee it has requested 
is approved subject to the completion of all conditions and 
requirements set forth by the Agency.
    Deficiency balance. The balance remaining on a loan after all 
collateral has been liquidated.
    Deficiency judgment. A monetary judgment rendered by a court of 
competent jurisdiction after foreclosure and liquidation of all 
collateral securing the loan.
    Energy projects. Commercially available projects that produce or 
distribute energy or power and/or produce biomass or biogas fuel. 
Commercially available energy projects that utilize technology that has 
a proven operating history, and for which there is an established 
industry for the design, installation, and service (including spare 
parts) of the equipment.
    Existing lender debt. A debt not guaranteed by the Agency, but owed 
by a borrower to the same lender that is applying for or has received 
the Agency guarantee.
    Fair market value. The price that could reasonably be expected for 
an asset in an arm's-length transaction between a willing buyer and a 
willing seller under ordinary economic and business conditions.
    Farmer's Home Administration (FmHA). The former agency of USDA that 
previously administered the programs of this Agency. Many Instructions 
and forms of FmHA are still applicable to Agency programs.
    Finance Office. The office which maintains the Agency financial 
accounting records located in St. Louis, Missouri.
    High-impact business. A business that offers specialized products 
and services that permit high prices for the products produced, may 
have a strong presence in international market sales, may provide a 
market for existing local business products and services, and which is 
locally owned and managed.
    Holder. A person or entity, other than the lender, who owns all or 
part of the guaranteed portion of the loan with no servicing 
responsibilities. When the single note option is used and the lender 
assigns a part of the guaranteed note to an assignee, the assignee 
becomes a holder only when the Agency receives notice and the 
transaction is completed through the use of Form RD 4279-6 or 
predecessor form.
    Interim financing. A temporary or short-term loan made with the 
clear intent that it will be repaid through another loan. Interim 
financing is frequently used to pay construction and other costs 
associated with a planned project, with permanent financing to be 
obtained after project completion.
    Lender. The organization making, servicing, and collecting the loan 
which is guaranteed under the provision of the appropriate subpart.
    Lender's Agreement (Business and Industry). Form RD 4279-4 or 
predecessor form between the Agency and the lender setting forth the 
lender's loan responsibilities when the Loan Note Guarantee is issued.
    Loan Agreement. The agreement between the borrower and lender 
containing the terms and conditions of the loan and the 
responsibilities of the borrower and lender.
    Loan Note Guarantee (Business and Industry). Form RD 4279-5 or 
predecessor form, issued and executed by the Agency containing the 
terms and conditions of the guarantee.
    Loan-to-value. The ratio of the dollar amount of a loan to the 
dollar value of the collateral pledged as security for the loan.
    Natural resource value-added product. Any naturally occurring 
product that is processed to add value to the product. For example, 
straw is processed into particle board.
    Negligent servicing. The failure to perform those services which a 
reasonably prudent lender would perform in servicing (including 
liquidation of) its own portfolio of loans that are not guaranteed. The 
term includes not only the concept of a failure to act, but also not 
acting in a timely manner, or acting in a manner contrary to the manner 
in which a reasonably prudent lender would act.
    Parity. A lien position whereby two or more lenders share a 
security interest of equal priority in collateral. In the event of 
default, each lender will be affected on a pro rata basis.
    Participation. Sale of an interest in a loan by the lender wherein 
the lender retains the note, collateral securing the note, and all 
responsibility for loan servicing and liquidation.
    Poor. A community or area is considered poor if, based on the most 
recent decennial census data, either the county, city, or census tract 
where the community or area is located has a median household income at 
or below the poverty line for a family of four; has a median household 
income below the nonmetropolitan median household income for the State; 
or has a population of which 25 percent or more have income at or below 
the poverty line.
    Promissory Note. Evidence of debt. ``Note'' or ``Promissory Note'' 
shall also be construed to include ``Bond'' or other evidence of debt 
where appropriate.
    Qualified Intellectual Property. Trademarks, patents or copyrights 
included on current (within one year) audited balance sheets for which 
an audit opinion has been received that states the financial reports 
fairly represent the values therein and the reported value has been 
arrived at in accordance with GAAP standards for valuing intellectual 
property. The supporting work papers must be satisfactory to the 
Administrator.
    Refinancing loan. A loan, all of the proceeds of which are applied 
to extinguish the entire balance of an outstanding debt.
    Rural Development. The Under Secretary for Rural Development has 
policy and operational oversight responsibilities for RHS, RBS and RUS.
    Spreadsheet. A table containing data from a series of financial 
statements of a business over a period of time. Financial statement 
analysis normally contains spreadsheets for balance sheet items and 
income statements and may include funds flow statement data and 
commonly used ratios. The spreadsheets enable a reviewer to easily scan 
the

[[Page 33189]]

data, spot trends, and make comparisons.
    State. Any of the 50 States, the Commonwealth of Puerto Rico, the 
Virgin Islands of the United States, Guam, American Samoa, the 
Commonwealth of the Northern Mariana Islands, the Republic of Palau, 
the Federated States of Micronesia, and the Republic of the Marshall 
Islands.
    Subordinated owner debt. Debt owed by the borrower to one or more 
of the owner(s) that is subordinated to debt owed by the borrower to 
the Agency or guaranteed by the Agency (aggregate B&I loan exposure) 
pursuant to a subordination agreement satisfactory to the Agency. The 
debt must have been issued in exchange for cash loaned to the borrower 
for the benefit of the borrower's business. The terms of the 
subordination agreement must provide that repayment will not commence 
until the earlier of the date all aggregate B&I loan exposure has been 
repaid or when a period of three consecutive years has passed during 
which the borrower has met all loan covenants and evidenced operating 
profit sufficient to commence partial repayment of this subordinated 
debt after giving effect to the annual debt service requirements of the 
aggregate B&I loan exposure. The partial repayment schedule in the case 
of the latter scenario is subject to annual Agency concurrence and may 
not be more accelerated than the rate of the debt repayment schedule in 
effect for the Agency's aggregate B&I loan exposure.
    Subordination. An agreement between the lender and borrower whereby 
lien priorities on certain assets pledged to secure payment of the 
guaranteed loan will be reduced to a position junior to, or on parity 
with, the lien position of another loan in order for the Agency 
borrower to obtain additional financing, not guaranteed by the Agency, 
from the lender or a third party.
    Tangible balance sheet equity. Total equity less the value of 
intangible assets recorded on the financial statements, as determined 
from balance sheets prepared in accordance with generally accepted 
accounting principles (GAAP), plus qualified intellectual property.
    Veteran. For the purposes of assigning priority points, a veteran 
is a person who is a veteran of any war, as defined in section 101(12) 
of title 38, United States Code.
    (b) Abbreviations.

B&I--Business and Industry
CF--Community Facilities
CLP--Certified Lenders Program
FSA--Farm Service Agency
FMI--Forms Manual Insert
NAD--National Appeals Division
OGC--Office of the General Counsel
RBS--Rural Business-Cooperative Service
RHS--Rural Housing Service
RUS--Rural Utilities Service
SBA--Small Business Administration
USDA--United States Department of Agriculture

    (c) Accounting terms not otherwise defined in this part shall have 
the definition ascribed to them under GAAP.

Subpart B--Business and Industry Loans

0
7. Section 4279.113 is amended by revising paragraph (r) and by adding 
a paragraph (cc) to read as follows:


Sec.  4279.113  Eligible loan purposes.

* * * * *
    (r) To refinance outstanding debt when it is determined that the 
project is viable and refinancing is necessary to improve cash flow and 
create new or save existing jobs. Except as provided for in Sec.  
4279.108(d)(4) of this subpart, existing lender debt may be included 
provided that, at the time of the application, the loan has been 
current for at least the past 12 months (unless such status is achieved 
by the lender forgiving the borrower's debt) and the lender is 
providing better rates or terms. Subordinated owner debt is not 
eligible under this paragraph. Unless the amount to be refinanced is 
owed directly to the Federal government or is Federally guaranteed, the 
refinancing must be a secondary part (less than 50 percent) of the 
overall loan.
* * * * *
    (cc) To finance energy projects. Commercially available energy 
projects that produce biomass fuel or biogas as an output must have 
completed two operating cycles at design performance levels submitted 
to the Agency. Projects that produce steam or electricity as an output 
must have met or exceeded acceptance test performance criteria 
submitted to the Agency and be successfully interconnected with the 
purchaser of the output. Performance or acceptance test requirements 
for all other energy projects will be determined by the Agency on a 
case by case basis. Financing for energy projects will only be allowed 
when the facility has been constructed according to plans and 
specifications and is producing at the quality and quantity projected 
in the application.

0
8. Section 4279.131 is amended by revising paragraph (d) to read as 
follows:


Sec.  4279.131  Credit quality.

* * * * *
    (d) Equity. (1) A minimum of 10 percent tangible balance sheet 
equity will be required for existing businesses at loan closing. A 
minimum of 20 percent tangible balance sheet equity will be required 
for new businesses at loan closing. For energy projects, the minimum 
tangible balance sheet equity requirement range will be between 25 
percent and 40 percent. Criteria for considering the minimum equity 
required for an individual application will be based on: existing 
businesses with successful financial and management history vs. start-
up businesses; personal/corporate guarantees offered; contractual 
relationships with suppliers and buyers; credit rating; and strength of 
the business plan/feasibility study. Where the application is a request 
to refinance outstanding Federal direct or guaranteed loans, without 
any new financing, the equity requirement may be determined using 
adjusted tangible net worth. An application that combines a refinancing 
guarantee request with a new loan guarantee request is subject to the 
standard, unadjusted, equity requirement except as provided in 
paragraphs (d)(1)(i) or (d)(1)(ii) of this section. Increases or 
decreases in the equity requirements may be imposed or granted as 
follows:
    (i) A reduction in the equity requirement for existing businesses 
may be permitted by the Administrator. In order for a reduction to be 
considered, the borrower must furnish the following:
    (A) Collateralized personal and corporate guarantees, including any 
parent, subsidiary, or affiliated company, when feasible and legally 
permissible (in accordance with Sec.  4279.149 of this subpart), and
    (B) Pro forma and historical financial statements that indicate the 
business to be financed meets or exceeds the median quartile (as 
identified in the Risk Management Association's Annual Statement 
Studies or similar publication) for the current ratio, quick ratio, 
debt-to-worth ratio, debt coverage ratio, and working capital.
    (ii) The approval official may require more than the minimum equity 
requirements provided in this paragraph if the official makes a written 
determination that special circumstances necessitate this course of 
action.
    (2) The equity requirement must be met in the form of either cash 
or tangible earning assets contributed to the business and reflected on 
the balance sheet.

[[Page 33190]]

    (3) The lender must certify that the equity requirement was 
determined using balance sheets prepared in accordance with GAAP and 
met upon giving effect to the entirety of the loan in the calculation, 
whether or not the loan itself is fully advanced, as of the date the 
guaranteed loan is closed.
* * * * *

    Dated: May 30, 2006.
Thomas C. Dorr,
Under Secretary, Rural Development.
 [FR Doc. E6-8891 Filed 6-7-06; 8:45 am]
BILLING CODE 3410-XY-P