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Business and Industry Guaranteed Loans--Tangible Balance Sheet Equity
Note: EPA no longer updates this information, but it may be useful as a reference or resource.
[Federal Register: January 16, 2004 (Volume 69, Number 11)]
[Proposed Rules]
[Page 2521-2528]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16ja04-16]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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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: Proposed rule.
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SUMMARY: The Rural Business-Cooperative Service (RBS or the Agency)
proposes to amend 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. Specifically,
the Agency proposes to modify 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. Adjusted
tangible balance sheet equity will also include qualified subordinated
debt owed to the owner. This adjusted equity calculation will apply
only in cases where the Agency is asked to guarantee a refinancing of
outstanding debt. The Agency also proposes to increase the equity
requirements applicable to energy businesses. The intended effect of
this action is to facilitate Agency guarantees of 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.
DATES: Written or e-mail comments on this proposed rule must be
submitted on or before March 16, 2004.
ADDRESSES: Submit written comments, in duplicate, via either the U.S.
Postal Service or express courier. Comments sent via the U.S. Postal
Service should be addressed to the Branch Chief, Regulations and
Paperwork Management Branch, Rural Development, U.S. Department of
Agriculture, STOP 0742, 1400 Independence Ave., SW., Washington, DC
20250-0742. Written comments via Federal Express Mail, or via another
mail courier service requiring a street address, should be addressed to
the same attention at 300 7th Street, SW., 7th Floor, Washington, DC
20024. Also, comments may be submitted via the Internet by addressing
them to ``comments@rus.usda.gov'' and must contain the word
``Tangible'' in the subject line. All written comments will be
available for public inspection during regular work hours at the 300
7th Street, SW., address listed above.
FOR FURTHER INFORMATION CONTACT: Fred Kieferle, Rural Business-
Cooperative Service, USDA, Stop 3224, Room 6871, 1400 Independence
Ave., SW, Washington, DC 20250-3224, Telephone (202) 720-7818, Fax
(202) 720-6003, or e-mail: fred.kieferle@usda.gov.
SUPPLEMENTARY INFORMATION:
Classification
This proposed 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.
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.
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.
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. The
changes made in this proposed rulemaking to part 4279 are covered under
the scope of the paperwork burden on file for these control numbers and
already approved by OMB. The revisions in this rulemaking for part 1980
will require an amendment to the burden package and this modification
to the burden package will be made when the final rule is promulgated.
Environmental Impact Statement
It is the determination of RBS 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 proposed 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
[[Page 2522]]
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 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 for achieve flexibility in
refinancing, while larger businesses may have other ways, i.e., other
assets to work with, to achieve the same result.
The proposed 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.
On balance, 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.
Background
The current loan processing regulations for 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; separate thresholds for all energy
related businesses also apply.
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 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\
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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 are 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 decreases. 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 captive to the existing lender that is the beneficiary of
the original Agency guarantee on what has become 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
[[Page 2523]]
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 USDA guaranteed, the taxpayer is
in a position of guaranteeing the higher interest rate when a lower
exposure could otherwise be effected 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 proposed rule is intended to provide the borrower with
refinancing flexibility 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 amount of
the refinancing loan may not exceed the outstanding balance of the loan
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 Agency has considered, but not elected 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 Agency has considered, but not elected to allow, full market
value refinancing in this 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.
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. 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 proposed 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 family capital. Tangible balance sheet equity
as defined in the proposed 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. In practice, the Agency has considered the dividing line
between new businesses and existing businesses in similar situations to
be three years. Thus, 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. In this
example, the income statement shows three years of
[[Page 2524]]
consecutive accrual losses, but breakeven cash flows. The reduced
equity requirement (from 20 percent to 10 percent) for existing
business could have been triggered earlier under existing regulations
had XYZ Company demonstrated a one full successful year of operations
prior to the end of year three.
This proposed rule also modifies 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 approved by the Agency for purposes of
underwriting the loan or loan guarantee. The higher equity requirements
reflect the Agency's determination that energy projects are riskier
than the average B&I portfolio loan. 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 RBS programs.
The proposed rule contemplates that energy projects must
demonstrate two complete operating cycles at design performance levels
submitted to and accepted by the Agency. 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 has been demonstrated.
List of Subjects in 7 CFR Parts 1980 and 4279
Loan programs--Business and industry--Rural development assistance,
Rural areas.
Accordingly, Chapters XVIII and XLII, title 7, of the Code of
Federal Regulations are proposed to be 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
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
2. Section 1980.402 is revised to read as follows:
Sec. 1980.402 Definitions.
(a) Definitions.
The following general definitions are applicable to the terms used
in this subpart. Additional definitions may be found in Sec. 1980.6 of
subpart A of this part.
Adjusted tangible net worth. Tangible balance sheet equity plus
allowed tangible asset appreciation and subordinated owner debt.
Allowed tangible asset appreciation. Allowed tangible asset
appreciation means 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, 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, 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.
Community facilities. For the purpose 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
[[Page 2525]]
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, or 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. Projects that produce or distribute energy and
projects that produce biomass or biogas fuel, where such projects
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.
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 FmHA or its successor agency
under Public Law 103-354 to a borrower setting forth the conditions
under which FmHA or its successor agency under Public Law 103-354 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.
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
insure there will be no loss on the B&I guaranteed loan.
State. Any of the fifty States, the Commonwealth of Puerto Rico,
the Virgin Islands of the United States, Guam, American Samoa and the
Commonwealth of the Northern Mariana Islands.
Subordinated owner debt. Debt owed by the borrower firm to 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.
The terms of the subordination agreement must provide that repayment
will not commence until the earlier of the date all indebtedness owed
to or guaranteed by the Agency 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 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).
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).
3. Section 1980.411 is amended by revising paragraph (a)(11)(iii),
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) * * *
(iii) It is necessary to place a permanent loan subsequent to an
interim loan for financing the construction of the project;
(iv) It does not refinance subordinated owner debt; and
(v) The refinancing loan guaranteed by the Agency does not exceed
the balance outstanding of the debt to be refinanced.
* * * * *
(16) Energy projects. Energy projects that produce biomass fuel,
biogas, fuel cells or batteries as an output must have completed two
operating cycles at design performance levels submitted to and accepted
by the Agency. Projects that produce steam or electricity as an output
must have met or exceeded acceptance test performance criteria
submitted to and approved by the Agency and be successfully
interconnected with the purchaser of the output. Performance or
acceptance test requirements for all other energy projects may 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.
* * * * *
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 the loan and guarantee closing (40
percent for energy related businesses). A minimum of 20 percent
tangible balance sheet equity will be required for new businesses at
the loan or guarantee closing (50 percent for all new energy related
businesses). Where the application is a request for only a refinancing
loan guarantee, without any related incremental new financing, the
equity requirement may be determined using adjusted tangible net worth.
An application that combines a refinancing guarantee request with a
[[Page 2526]]
new loan 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 guaranteed loan is closed.
CHAPTER XLII--RURAL BUSINESS-COOPERATIVE SERVICE AND RURAL UTILITIES
SERVICE, DEPARTMENT OF AGRICULTURE
PART 4279--GUARANTEED LOANMAKING
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
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.
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 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.
Conditional Commitment (Business and Industry). Form 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. Projects that produce or distribute energy and
projects that produce biomass or biogas fuel, where such projects
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.
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.
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 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 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.
[[Page 2527]]
Loan Note Guarantee (Business and Industry). Form 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 non-metropolitan 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.
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 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 firm to 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.
The terms of the subordination agreement must provide that repayment
will not commence until the earlier of the date all indebtedness owed
to or guaranteed by the Agency 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 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).
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
7. Section 4279.113 is amended by revising paragraph (q) and by
adding a paragraph (bb) to read as follows:
Sec. 4279.113 Eligible loan purposes.
* * * * *
(q) 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. Existing lender debt may be eligible
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 borrower will
receive better rates or terms. Subordinated owner debt is not eligible
under this paragraph. A refinancing loan guaranteed by the Agency may
not exceed the balance outstanding of the debt to be refinanced.
* * * * *
(bb) To finance energy projects. Energy projects that produce
biomass fuel, biogas, fuel cells or batteries as an output must have
completed two operating cycles at design performance levels submitted
to and accepted by the Agency. Projects that produce steam or
electricity as an output must have met or exceeded acceptance test
performance criteria submitted to and approved by the Agency and be
successfully interconnected with the purchaser of the output.
Performance or acceptance test requirements for all other energy
projects may 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.
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
[[Page 2528]]
will be required for existing businesses at the loan and guarantee
closing (40 percent for energy related businesses). A minimum of 20
percent tangible balance sheet equity will be required for new
businesses at the loan or guarantee closing (50 percent for all new
energy related businesses). Where the application is a request for only
a refinancing loan guarantee, without any related incremental 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, 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.
(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: January 12, 2004.
John Rosso,
Administrator, Rural Business-Cooperative Service.
[FR Doc. 04-979 Filed 1-15-04; 8:45 am]