[Federal Register Volume 59, Number 55 (Tuesday, March 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6647]
[[Page Unknown]]
[Federal Register: March 22, 1994]
_______________________________________________________________________
Part VIII
Department of Agriculture
_______________________________________________________________________
Rural Electrification Administration
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7 CFR Part 1786
Discounted Prepayments on REA Electric Loans; Final Rule
DEPARTMENT OF AGRICULTURE
Rural Electrification Administration
7 CFR Part 1786
Discounted Prepayments on REA Electric Loans
AGENCY: Rural Electrification Administration, USDA.
ACTION: Final rule.
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SUMMARY: The Rural Electrification Administration (REA) is adding a new
regulation to allow electric borrowers to prepay their REA notes at a
discounted present value. The new subpart establishes policies and
procedures to implement the provisions of the ``Rural Electrification
Administration Improvement Act of 1992,'' and will provide REA policies
and procedures regarding REA borrowers who wish to prepay REA loans at
a discounted present value.
EFFECTIVE DATE: This final rule is effective March 22, 1994.
FOR FURTHER INFORMATION CONTACT: Patrick Shea, Financial Analyst,
Program Support Staff, U.S. Department of Agriculture, Rural
Electrification Administration, room 2234-S, 14th and Independence
Avenue, SW., Washington, DC 20250-1500, telephone number (202) 720-
0736, FAX (202) 720-4120.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This final rule has been determined to be not-significant for
purposes of Executive Order 12866, Regulatory Planning and Review, and
therefore has not been reviewed by the Office of Management and Budget.
However, the proposed rule was reviewed by the Office of Management and
Budget in conformance with Executive Order 12291 and Departmental
Regulation 1512-1.
Executive Order 12778
This final rule has been reviewed under Executive Order 12778,
Civil Justice Reform. This final rule: (1) Will not preempt any state
or local laws, regulations, or policies, unless they present an
irreconcilable conflict with this rule; (2) Will not have any
retroactive effect; and (3) Will not require administrative proceedings
before any parties may file suit challenging the provisions of this
rule.
Regulatory Flexibility Act Certification
This action does not fall within the scope of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.).
Information Collection and Recordkeeping Requirements
In compliance with the Office of Management and Budget (OMB)
regulations (5 CFR part 1320) which implements the Paperwork Reduction
Act of 1980 (Pub. L. 96-511) and section 3504 of that Act, the
information collection and recordkeeping requirements contained in this
final rule have been submitted to OMB for review. Comments concerning
these requirements should be directed to the Office of Information and
Regulatory Affairs of OMB, Attention: Desk Officer for USDA, room 3201,
NEOB, Washington, DC 20503.
National Environmental Policy Act Certification
The Administrator has determined that this final rule will not
significantly affect the quality of the human environment as defined by
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).
Therefore, this action does not require an environmental impact
statement or assessment.
Catalog of Federal Domestic Assistance
The program described by this final rule is listed in the Catalog
of Federal Domestic Assistance Programs under number 10.850 Rural
Electrification Loans and Loan Guarantees. This catalog is available on
a subscription basis from the Superintendent of Documents, the United
States Government Printing Office, Washington, DC 20402-9325.
Executive Order 12372
This final rule is excluded from the scope of Executive Order
12372, Intergovernmental Consultation. A Notice of Final Rule entitled
Department Programs and Activities Excluded from Executive Order 12372
(50 FR 47034) exempts REA loans from coverage under this Order.
Background
The proposed rule for Discounted Prepayments on REA Electric Loans
was published on September 16, 1993, at 58 FR 48465 under 7 CFR part
1786. Comments were requested and a total of 15 organizations and
individuals responded within the 30-day comment period. All comments
were considered and some revisions were made in response to those
comments.
REA is adding a new subpart to part 1786 to implement Public Law
102-428 cited as the ``Rural Electrification Administration Improvement
Act of 1992.'' Section 2 of Public Law 102-428 amended Section 306B of
the Rural Electrification Act of 1936 (RE Act)(7 U.S.C. 901 et seq.) to
enable a borrower of REA electric loans to prepay its REA direct and
insured loans at the lesser of: (A) The outstanding principal balance
of the loan or; (B) the present value of the loan discounted from the
face value of each payment at maturity at the rate established by the
Administrator. The discount rate applicable to the prepayment of a loan
shall be the then current cost of funds to the Department of the
Treasury for obligations of comparable maturity to the remaining term
of the loan. Before this new legislation was enacted a direct or
insured loan made under the Act could not be sold or prepaid at a value
that was less than the outstanding principal balance on the loan.
A prior law (Pub. L. 99-509) allowed for a prepayment of REA
electric and telephone loans at a discounted present value, but that
prepayment had to take place prior to October 1, 1987. Twenty nine REA
electric borrowers took advantage of that prepayment law. Later,
another amendment (Pub. L. 101-624) was passed allowing borrowers that
had merged with one of the 29 previous borrowers of electric loans who
had prepaid, to prepay at a discounted present value. This prepayment
had to take place within one year of the merger.
The new law (Pub. L. 102-428) does not have any deadline or
expiration date. The regulations implementing the prior prepayment
programs required that borrowers prepay all of their outstanding REA
debt obligations and agree not to apply for any additional REA
financial assistance, unless they first repaid the amount of the
discount, plus interest. Public Law 102-428 allows borrowers who prepay
at a discount to remain eligible for REA financial assistance, other
than direct or insured loans, including rural development loans and
grants and loan guarantees.
Borrowers may prepay at a discount all, or a portion of,
outstanding REA debt provided the loan funds were advanced prior to May
1, 1992, or have been advanced for not less than 2 years. Borrowers may
apply for direct or insured loans 120 months after the date of the most
recent prepayment. During the 120-month period, the Administrator may
consider providing such a loan if, among other matters: (1) The loan is
necessary to assure repayment of, or protect the Government's security
for any outstanding direct loans, insured loans, or loan guarantees; or
(2) the borrower's system has suffered severe physical plant related
damage due to conditions beyond its control and the borrower is unable
to obtain financing at reasonable terms to restore the system from non-
REA sources, including the Federal Emergency Management Agency, and
from private sources.
This new law also allows those borrowers who prepaid under the
prior laws to remain eligible for financial assistance under the RE Act
in the same manner as other borrowers who take advantage of this new
law. If a prior prepayer wishes to apply for direct or insured REA
loans, it must first wait 180 months from the date of the prepayment
and then, if the discount was based on the average rate on utility
bonds bearing a rating of ``Aa'' as set forth in Moody's Public Utility
News Reports, pay the difference between that discount and the amount
of discount that would have been allowed using the discount rate
specified in this regulation which is based on the cost of funds to the
U.S. Treasury at the time of prior prepayment plus interest on said
difference from the date of that prepayment.
Several section numbers and headings of the final rule have been
added and modified and others have been reserved. One of these reserved
sections will be used to describe the methodology for prepayments of
the new municipal rate loan program. Details of this loan program are
set forth in REA regulations published December 20, 1993, at 58 FR
66260, as an interim rule. It would be premature to determine a
methodology for the prepayment of these loans until the regulation
governing this loan program is finalized.
Finally, this regulation sets out the procedure for borrowers who
wish to take advantage of this prepayment program.
Comments
The comments are discussed under the appropriate section number and
heading of the proposed rule. Some of these section numbers and
headings have been changed in this final rule. Generally, many of the
comments indicate a misunderstanding that the regulation was written
for a single prepayment of all outstanding REA debt. This rule
describes the process for prepayments of all or a part of outstanding
REA debt. There will be one prepayment agreement pursuant to which a
borrower may prepay all or a part of its REA debt through one or more
closings. The regulation has been revised to make clear that the
prepayment agreement contemplates an initial prepayment and at the
borrower's discretion, subsequent prepayments.
Section 1786.153 Discounted Present Value
Comment: A comment was received that suggested that the use of the
State and municipal bond interest rate from the Federal Reserve
Statistical Release was inappropriate for the purpose of the tax exempt
financing adjustment. This interest rate is based on 20-year tax exempt
bonds while it is being subtracted from an interest rate based on ``A''
rated utility bonds of 30 years.
Response: The tax exempt adjustment for the discount rate has been
changed to correct the inappropriate match caused by subtracting a 20-
year issue rate from a 30-year issue rate. Instead, the interest rate
for the new municipal rate REA loan program, as set forth in 7 CFR
1714.5 published December 20, 1993, at 58 FR 66266, will be used as the
discount rate when this adjustment for tax exempt financing is
necessary. See Sec. 1786.153(b).
Comment: Several commenters suggested that the timeframe of setting
the discount rate is too short. One commenter stated that ``The time
between the public offering of debt and closing on the issue is usually
3 weeks. In order to properly size the refinancing, the borrower needs
to know the date and amount of the prepayment. The proposed regulations
@ (sic.) 1786.158(e), only give 3 - 8 business days notice of the
amount, and undefined notice of the date.''
Response: The timeframe set for selecting the discount rate and
calculating the amount of discounted present value prepayment has been
determined based on REA experience. It is the same timeframe (8
business days) that was used in the last REA discounted prepayment
regulation found at 1786 subpart E. REA must set the discount rate as
close as possible to closing because the legislation provides that the
discount rate shall be the cost of borrowing to the U.S. Treasury at
the time of prepayment. If a public debt issuance is going to be used
to finance a prepayment REA will try to facilitate the timing of that
transaction. REA has added new sections to the regulation at
Secs. 1786.159 and 1786.160 to provide a preclosing notice not less
than 10 business days prior to closing to notify the borrower of the
closing date.
Section 1786.155 Eligible Borrower
Comment: Restructured loans should not be restricted from prepaying
at a discount.
Response: The terms and conditions of existing restructure
agreements vary from borrower to borrower. Some restructured loans no
longer have the same term to maturity. Some of these agreements
consolidated all debt into one note which included direct REA loans and
guaranteed loans. REA guaranteed loans are not eligible for a
discounted prepayment under this section. In many cases the interest
rate and term to maturity were arrived at considering all of this
consolidated debt. The original notes may have been granted an extended
maturity and, in some cases, some of the restructured debt was put
under new notes with an indefinite maturity and no accumulated
interest. In other cases the original REA notes remained intact and
other debt was restructured. Any prepayment of any portion of the debt
would require that all remaining debt be reevaluated.
However, REA recognizes that in some cases the terms of restructure
agreements might not be inconsistent with or preclude prepayment under
this regulation. Section 1786.155 has been changed to allow REA to
consider the eligibility of borrowers with restructured loans on a
case-by-case basis.
Comment: A comment was submitted regarding the requirement that no
REA loan funds could be left in the Construction Fund Account at the
time of closing. The commenter suggested that the regulation be
modified to allow the borrower to simply repay these funds at full
value.
Response: REA agrees that a borrower may simply repay these funds
at face value and then proceed with the prepayment of all other
advanced funds. This restriction, as required by the legislation,
prevents borrowers from receiving any REA direct or insured loan funds
during the 120-month period after a prepayment. REA direct or insured
loan funds in the Construction Fund must be expended for approved
purposes or repaid at face value to REA before a prepayment at a
discount. It is the borrower's choice to meet this eligibility
requirement with either of the two suggested methods.
Comment: The rescission of unadvanced loan funds should be required
at closing rather than at the time of application.
Response: The regulation has been modified to reflect this comment.
See Sec. 1786.158 (j) of this final rule.
Section 1786.156 Application Procedure
Comment: A comment was received concerning the requirement that the
source of financing should be identified. The comment questions the
need of the borrower to provide evidence that it has the ability to
obtain the necessary financing because the REA is ``unlikely to incur
any costs or processing burden'' if the financing is not obtained. REA
should accept a certification of the General Manager that it has the
ability to obtain the necessary funds to repay rather than the
requirement that the borrower provide ``evidence'' that it has this
ability.
Response: It is important for REA to know that the borrower has the
ability to obtain financing and to identify the source of that
financing. If the financing is to be tax exempt, REA must make an
adjustment in its discount rate. REA will normally accept a
certification of the General Manager as ``evidence'' of the ability to
obtain the necessary financing.
Comment: Several commenters stated that the application period is
too long (60 days) considering that commercial banks only extend credit
for 30 days and bond purchase agreements on privately placed debt
issues only last 1 to 3 weeks.
Response: The application procedure at Sec. 1786.156 has been
changed to address the timing of the processing of prepayments. REA
will respond to an application within 30 days and the borrower will
then have the right to request a closing date. However in selecting a
closing date the borrower should ensure that it will have sufficient
time to meet all conditions of closing. For example, if the borrower
needs to process a lien accommodation it may take 50 days as provided
for a normal review under the lien accommodation rule found at 7 CFR
part 1717 subpart R. Utility companies must have available credit
arrangements and it is assumed that any REA borrower who wishes to
prepay at a discount and not be eligible for additional REA financial
assistance for 120 months would not prepay unless it had secured
adequate credit arrangements.
Comment: One commenter stated that borrowers using outside
financing will have to obtain a lien accommodation and inquired about
REA policies regarding lien accommodations.
Response: The Lien Accommodations and Subordinations regulation, 7
CFR subpart R was published as a final rule October 19, 1993. The
borrower is responsible for obtaining the appropriate lien
accommodation and it should apply for that lien accommodation within
the timeframes specified in that regulation.
Comment: Several comments questioned whether REA had the legal
authority to disapprove an application.
Response: REA must reserve the right to review and approve
applications under its prepayment program. If a borrower executes a
prepayment agreement and only prepays a portion of its REA loans and at
a later date elects to prepay some or all of its remaining REA loans,
then REA must review the borrowers request because circumstances could
have changed to make it ineligible to prepay. Examples of a change in
circumstances after a partial prepayment include the borrower's failure
to honor its wholesale power contract or a default on the repayment of
outstanding REA loans.
Comment: One commenter objected to the Administrator having the
right to request additional information for an incomplete application.
Response: REA must retain some flexibility to address particular
situations including those not contemplated in the legislation. It
should be noted that this is consistent with other regulations, such as
7 CFR 1710.150, which require that additional information may be
necessary for the Administrator to make certain findings required by
the RE Act and prudent lending practice.
Section 1786.158 Terms and Conditions of Prepayment Agreement
There were many comments concerning the terms and conditions of the
prepayment agreement including:
Comment: The 60-day application period and the 60-day closing
notice are too long.
Response: The application procedures have been changed to reflect
this concern. However, REA needs a reasonable time to process a
prepayment request and agreement and the borrower needs time to meet
other regulatory and contractual requirements. If the borrower has its
paperwork in order and there are no complications with approvals of
other lenders and state regulatory authorities, then the execution date
may not require as much time as contemplated in the proposed rule. See
Sec. 1786.159 of this final rule. After the initial prepayment closing,
subsequent prepayments will not normally require more than 30 days
notice. See Sec. 1786.160 of this final rule. If a borrower wishes to
make a prepayment of less than all outstanding REA debt and use outside
financing, the borrower may need to get an REA lien accommodation. The
timeframes for obtaining a lien accommodation, described in 7 CFR part
1717, are approximately 15 to 30 days for Advance approval and 20 to 50
days for Normal review. Obtaining a lien accommodation is the
borrower's responsibility.
Comment: The ability of the Administrator to reschedule closings to
meet administrative considerations should not be allowed.
Response: The Administrator must have this discretion because of
the varying demands and increased borrower flexibility of the REA loan
program. REA does not expect to change any scheduled closing dates
except in extraordinary circumstances.
Comment: REA should include a consent to issue refunding debt when
a public debt offering is going to be used to fund a prepayment.
Response: This regulation has been written to address the typical
REA discounted prepayment, which does not involve a public debt
offering. REA will try to accommodate the special needs of a public
debt refinancing where necessary on a case-by-case basis.
Comment: REA should specify when it will make available a release
of lien.
Response: Sec. 1786.161 of the rule has been revised to clarify
that REA will normally provide required releases simultaneously with
the prepayment of all REA debt.
Comment: An objection was submitted concerning REA's ability to
terminate the right of a borrower to prepay.
Response: If a borrower is interested in making a prepayment of
less than all outstanding REA loans, then the prepayment agreement will
give the borrower the right to make a series of partial prepayments
over an indefinite period of time. If the borrower's conditions change
after the agreement is executed that would make the borrower ineligible
to make a prepayment, such as a default in the repayment of outstanding
REA loans, REA must retain the capacity to terminate the right of a
borrower to prepay.
Comment: What security instrument will be necessary if a borrower
wants or has outstanding rural development loans after all REA debt has
been paid off?
Response: The security required for rural development loans held by
borrowers prepaying REA debt will be addressed on a case-by-case basis.
Section 1786.160 (Sec. 1786.163 in This Final Rule) Existing Wholesale
Power Contracts
Comment: Several commenters questioned the need for and basis of
the requirement that a prepaying borrower enter into a supplement to
its wholesale power contract. One commenter suggested that the
requirement represented an attempt to restrict the business and freedom
of contract of the prepaying borrower and will frustrate the purpose of
the RE Act to allow cooperatives to finance their activities from
private capital sources.
Response: Since the early days of the REA program, REA has made
loans to provide electric service in rural areas through a two tiered
system consisting of distribution borrowers and power supply borrowers.
The power supply borrowers are owned and controlled by their members,
the distribution borrowers. The distribution borrowers are bound to the
power supply borrower by 35-year all-requirements contracts. The
contracts assure that the power supply facilities financed by REA will
be dedicated to serving persons in rural areas and that the
distribution borrowers will financially support the power supplier.
Wholesale power contracts in the form prescribed by REA are a key part
of the Government's security for loans to the power supply borrowers.
For further discussion, see 55 FR 38930.
The required supplement to the wholesale power contract serves only
to clarify the rights of the respective parties in the event that a
distribution borrower undertakes an action, such as the sale of a
substantial part of its system, that may have an adverse effect on the
power supply borrower, the integrated distribution/power supply system,
or REA. The required supplement does not change the fundamental rights
of the parties to the contract. In the case of Tri-State G & T Assn. v.
Shoshone River Power & Light, 874 F.2d 1359 (10th Cir. 1989), the court
concluded that the existing form of contract obligates a distribution
member to maintain its power requirements and remain in business
throughout the term of the contract, that interference with the
contract (in that case, a sell-out by a distribution member to an
investor-owned utility) would ``constitute an abuse of the federal
program'' (p. 1360). Rather, the supplement sets forth the procedure
pursuant to which the borrower may sell out its system or otherwise
take an action that affects its power requirements. The supplement
strikes a balance that in effect allows the borrower to buy its way out
of the contract on terms and conditions to be negotiated between the
parties and subjected to REA approval and that will be designed to
avoid adversely impacting the rates of other members or the power
supply borrower's ability to repay its loans and other obligations. In
no sense does the supplement discourage borrowers from financing their
activities from private lending sources.
REA has concluded that the clarification is in the interests of the
REA program particularly when a distribution borrower is prepaying all
REA indebtedness and will no longer be subject to those controls and
approval rights set forth in the REA loan contract, mortgage and
regulations. A similar requirement was imposed in the previous REA
discounted prepayment program implemented in 1986. See 7 CFR subpart C
Sec. 1786.54(g). The requirement is entirely consistent with the
prepayment provisions of the RE Act which provide that ``the
Administrator may establish (terms and conditions) that are reasonable
and necessary to carry out this subsection.'' (section 306B(a)(4)). REA
has, however, added a provision permitting the Administrator to grant
an exemption to the requirement that a borrower enter into a supplement
to its wholesale power contract in appropriate circumstances.
Comment: Several commenters suggested that, because the
supplemental contract requires payments made pursuant to a buyout by a
distribution borrower to be paid directly to a noteholder, the power
supplier could incur costly prepayment penalties and other problems.
The commenters suggested that alternative payment arrangements be
permitted.
Response: REA has modified the language of the supplemental
contract to allow alternative payment arrangements in applying the
proceeds of a buyout.
Comment: There was a comment questioning the need to enter into a
supplement to the existing wholesale power contract if the borrower is
already operating under the most current form of contract.
Response: A new provision has been added to Sec. 1786.163 of this
final rule which may allow those borrowers who are operating under the
new form of wholesale power contract, which has a provision like the
one in this regulation to be exempted from this requirement.
Section 1786.161 (Sec. 1786.164 in This Final Rule) Loan Fund Audit
Comment: There was one objection to the requirement that REA
schedule an audit within 6 months of a prepayment of all REA loan
funds. The objection was directed at requiring the audit to be
performed prior to closing.
Response: It is REA's practice to insure, through an audit, that
its loan funds are spent only for approved RE Act purposes. The field
accountant's work load requires a reasonable length of time to schedule
this audit. REA believes that ``within six months'' of prepayment of
all outstanding REA debt is a reasonable time. To schedule the loan
fund audit at or before closing would result in a delay of the closing
of up to 6 months. If the borrower prefers this option, it can be
arranged.
Section 1786.162 Records (Sec. 1786.165 Reporting, in This Final Rule)
Comment: There was one objection to the requirement that a loan
fund audit of the borrowers' records must be performed, after prepaying
all REA electric loans, if a borrower continues to have outstanding
rural development loans. The proposed requirement would leave a
borrower subject to all of the audit procedures of 7 CFR part 1773. The
comment suggested that any audit should only be directed at those rural
development loans.
Response: This requirement is directed at REA's obligation to see
that its loan and grant funds are spent in compliance with the
respective agreements, that loans are repaid to REA according to
contract, and that the borrower is otherwise in compliance with the
provisions of its loan and security agreement. This section has been
modified to relieve the borrower of the auditing procedures prescribed
in 7 CFR part 1773. The borrowers' records must remain open to an audit
by REA as long as there are outstanding rural development loans and/or
grants.
Section 1786.164 (Sec. 1786.167 in This Final Rule) Restrictions to
Additional REA Financing
Comment: Several comments objected to the language limiting the
Administrator's discretion to only allowing direct or insured loans
during the 120-month restricted period to protect outstanding
Government loans.
Response: REA has revised the language so that the Administrator's
discretion is not limited. Nonetheless, REA anticipates that the
discretion will be exercised only in unusual cases examples of which
are included in the regulatory text.
Section 1786.165 (Sec. 1786.168 in This Final Rule) Borrowers who
Prepaid Under This Part Prior to October 21, 1992
Comment: Several comments argued that former borrowers who prepaid
at the discount based on the ``Aa'' utility rate prior to October 1,
1987, must be treated in the same manner as other borrowers with
respect to reentry into the loan program and that REA had changed the
meaning of the legislation regarding the requirements that must be met
to qualify for this reentry after a discounted prepayment.
Response: REA believes that the intent of this legislation was
clearly to treat all borrowers equally. As the legislation makes clear,
this requires first, the repayment of the difference between the deeper
prepayment discount in 1986 and 1987 and the Treasury-based discount
required under this regulation. Second, since borrowers who participate
in the current prepayment program, are restricted from receiving any
direct or insured REA loan funds for 120 months from the date of that
prepayment, so too the prior prepayers must also wait 180 months from
the date of their prepayment which was prior to October 1, 1987. Both
of these requirements must be met before the prior payers would be on
an equal playing field with the current borrowers who prepay under this
regulation.
Comment: Several comments also argued that former borrowers who
prepaid at the discount based on the ``Aa'' utility rate prior to
October 1, 1987, must be treated in the same manner as other borrowers
with respect to eligibility for loan guarantees and rural development
loans, without meeting any additional requirements.
Response: REA has changed Sec. 1786.168(c) in the final rule to
permit former borrowers who prepaid prior to October 1, 1987, to apply
for loan guarantees and rural development loans.
List of Subjects in 7 CFR Part 1786
Accounting, Administrative practice and procedure, Electric
utilities.
For reasons set forth in the preamble, REA proposes to amend title
7 of the Code of Federal Regulations to add a new subpart F to 7 CFR
part 1786 to read as follows:
PART 1786--PREPAYMENT OF REA GUARANTEED AND INSURED LOANS TO
ELECTRIC AND TELEPHONE BORROWERS
Subpart F--Discounted Prepayments on REA Electric Loans
Sec.
1786.150 Purpose.
1786.151 Definitions and rules of construction.
1786.152 Prepayments of REA loans.
1786.153 Discounted present value.
1786.154 Qualified Notes.
1786.155 Eligible borrower.
1786.156 Application procedure.
1786.157 Approval of applications.
1786.158 Terms and conditions of prepayment agreement.
1786.159 Initial closing.
1786.160 Subsequent closings.
1786.161 Return of Qualified Notes and release of lien.
1786.162 Outstanding loan documents.
1786.163 Existing wholesale power contracts.
1786.164 Loan fund audit.
1786.165 Reporting.
1786.166 Approvals.
1786.167 Restrictions to additional REA financing.
1786.168 Borrowers who prepaid under this part prior to October 21,
1992.
1786.169 Liability.
1786.170 Prepayment of loans approved after December 20, 1993.
[Reserved]
1786.171-1786.199 [Reserved]
Subpart F--Discounted Prepayments on REA Electric Loans
Authority: 7 U.S.C. 901 et seq.; Delegation of Authority by the
Secretary of Agriculture, 7 CFR 2.23, Delegation of Authority by the
Under Secretary for Small Community and Rural Development, 7 CFR
2.72.
Sec. 1786.150 Purpose.
This subpart sets forth the policies and procedures of REA whereby
borrowers may prepay, with private financing or internally generated
funds, outstanding REA Notes evidencing electric loans at the
Discounted present value of the REA Notes, pursuant to the provisions
of section 306(B) of the RE Act as amended by Public Law 102-428, 106
Stat. 2183, adopted October 21, 1992.
Sec. 1786.151 Definitions and rules of construction.
(a) Definitions. As used in this subpart:
Administrator means the Administrator of the Rural Electrification
Administration (REA).
Borrower means any organization which has an outstanding note(s)
evidencing electric loans made by REA, or has previously prepaid such
notes under subparts C and E of this part.
Business day means any day on which both the REA and the Federal
Reserve Bank of New York are open for business.
Construction Fund Account means the Cash--Construction Fund--
Trustee Account, maintained by the borrower pursuant to the terms of
the outstanding REA Loan Contract.
Closing shall mean one of the several contemplated closings of the
prepayment of the Qualified Notes prescribed by the Prepayment
agreement.
Closing date shall mean any business day identified as such by the
Government in its preclosing notice delivered to the Company pursuant
to Sec. 1786.158.
Closing request shall mean a request by the borrower of the
Government to schedule a closing for certain Qualified Notes on the
date requested therein.
Direct loan means a loan made pursuant to section 4 of the RE Act.
Discounted present value shall have the meaning set forth in
Sec. 1786.153.
Distribution borrower means a borrower that sells electric power
and energy at retail in rural areas.
Electric loan means a Direct loan or an Insured loan made for the
purpose of furnishing electric energy to persons in rural areas.
Final maturity means the final date on which all outstanding
principal and accrued interest on an electric loan is due and payable.
Government means the United States of America, acting through the
Administrator of the Rural Electrification Administration.
Insured loan means a loan made pursuant to Section 305 of the RE
Act.
Lien accommodation means the sharing of the Government's (REA's)
lien on property, usually all property, covered by the lien of the REA
Mortgage.
Loan guarantee means a loan guarantee under Section 306 of the RE
Act.
Power supply borrower means a borrower that sells or intends to
sell electric power at wholesale to distribution or power supply
borrowers pursuant to REA wholesale power contracts.
Preclosing notice shall mean a notice delivered by the Government
to the borrower in response to a closing request, identifying the
closing date, the Qualified Notes to be prepaid at such closing and
documents to be delivered by the borrower to the Government prior to
the closing date.
Prepayment agreement shall have the meaning set forth in
Sec. 1786.158.
Qualified Notes shall have the meaning set forth in Sec. 1786.154.
RE Act means the Rural Electrification Act of 1936, as amended (7
U.S.C. 901 et seq.).
REA means the Rural Electrification Administration, an agency of
the United States Department of Agriculture.
REA Loan Contract means the agreement, as amended, supplemented, or
restated from time to time, between a borrower and REA providing for
loans or loan guarantees pursuant to the RE Act.
REA Mortgage means collectively those mortgages and security
agreements made by and among the borrower, the Government, and third
parties, if any, securing indebtedness evidencing electric loans or
loan guarantees made pursuant to the RE Act.
Rural development loans means loans or grants made pursuant to
Rural development programs.
Rural development programs means loan or grant programs under the
authority of the Administrator pursuant to sections 313, 501, and 502
of the RE Act.
Supplemental lender means a private lender whose loan to the
borrower is secured by the REA mortgage.
Tax exempt financing means borrowing evidenced by bonds, notes and
other evidence of indebtedness the income of which is excluded from
gross income for the purposes of Chapter 1 of the Internal Revenue Code
of 1986 (26 U.S.C. ch. 1).
(b) Rules of construction. Unless the context shall otherwise
indicate, the terms defined in paragraph (a) of this section include
the plural as well as the singular, and the singular as well as the
plural.
Sec. 1786.152 Prepayments of REA loans.
An electric loan made under the RE Act shall not be sold or prepaid
at a value that is less than the outstanding principal balance, except
that, on request of a borrower, an electric loan made under the RE Act,
or a portion of such a loan, that was advanced before May 1, 1992, or
has been advanced for not less than 2 years, shall be prepaid by the
borrower at the lesser of the outstanding principal balance of the loan
or the discounted present value thereof.
Sec. 1786.153 Discounted present value.
(a) The discounted present value shall be calculated by summing the
present values of all remaining payments on all Qualified Notes to be
prepaid according to the following formula and adjusted as provided in
paragraph (b) of this section if tax exempt financing is used.
TR22MR94.016
Where:
The Greek letter, Sigma () means the sum of the following
terms.
The Greek letter, Pi () means the product of the following
terms.
Pk=Total payment, including interest due on the Kth payment
date following the prepayment date.
n=Total number of remaining payment dates to final maturity.
D1i=Number of days in the ith payment period that are in a
non-leap year (365-day year).
D2i=Number of days in the ith payment period that are in a
leap year (366-day year).
I=The discount rate applied to each transaction ascertained by using
data specified in the ``Federal Reserve Statistical Release'' (H.15
(519)), which is published each Monday. The availability of this
Release will be announced when the information is available by
telephone on (202) 452-3206. See adjustment for tax exempt refinancing
at paragraph (b) of this section. The specific discount rate will be
based on the discount rate(s) specified in the ``Treasury Constant
Maturities'' section of this publication 8 business days prior to the
closing and will be interpolated from that information as follows:
------------------------------------------------------------------------
Remaining final maturity of REA loan:
----------------------------------------------------------
At least But less Treasury
----------------------------------------------- than constant
----------- maturities
# years # years
------------------------------------------------------------------------
0............................................. 2 1-year.
2............................................. 3 2-year.
3............................................. 4 3-year.
4............................................. 5 (1)
5............................................. 6 5-year.
6............................................. 7 (2)
7............................................. 8 7-year.
8............................................. 9 (3)
9............................................. 10 (3)
10............................................ 11 10-year.
11............................................ 20 (4)
20............................................ 21 20-year.
21............................................ 30 (5)
30............................................ 36 30-year.
------------------------------------------------------------------------
Notes: 1The arithmetic mean between the 3-year. and 5-year. Treasury
Constant Maturities; i.e., if 3-year. rate is 3.00% and the 5-year.
rate is 4.00% then the rate used would be 3.5%.
2The arithmetic mean between the 5-year and 7-year Treasury Constant
Maturities computed as above.
3A straight line interpolated rate between the 7-year rate and the 10-
year rate. (See formula below)
4A straight line interpolated rate between the 10-year note and the 20-
year Bond rate. (See formula below)
5A straight line interpolated rate between the 20-year bond and the 30-
year bond using the following formula:
TR22MR94.017
Where:
I=The discount rate interpolated from the cost of money to the
Treasury.
A=The Treasury interest rate for the most recently published maturity
(in years) that is the shortest Treasury term (in years) which is
greater than the borrower's remaining term (in years) to final
maturity; i.e., (if the note to be prepaid has a final maturity of more
than 10 years then this rate is the 20-year Treasury rate)
B=The Treasury interest rate for the most recently published maturity
(in years) that is the longest Treasury term (in years) which is less
than the borrower's remaining term (in years) to final maturity; i.e.,
(if the note to be prepaid has a final maturity of more than 10 years
but less than 20 years then this term is the 10-year Treasury rate)
C=The remaining number of full years to the final maturity of the
borrower's note. Drop all fractions of a year and use the remaining
full years.
E=The published Treasury term (in years) to maturity which is the
longest term to maturity for the published term that is less than the
remaining term (in years) to final maturity of the borrower's note;
i.e., (if the note to be prepaid has remaining years to maturity
between 11 and 20 years then this term would be 10 or if the note to be
prepaid has remaining years to maturity between 21 years and 30 years
then this term would be 20).
F=The published Treasury term (in years) to maturity which is the
shortest term to maturity for the published term that is greater than
the remaining term (in years) to maturity of the borrower's note; i.e.,
(if the note to be prepaid has remaining years to maturity between 11
and 20 years then this term would be 20 or if the remaining years to
maturity is between 21 and 30 years then this term would be 30).
Note: The percentage terms used in the above formula will be
truncated to two decimal places. For the purpose of the terms A, B,
E, and F above the published Treasury rate and term shall mean the
Treasury Constant Maturities from the Federal Reserve Statistical
Release for 7 years, 10 years, 20 years, and 30 years.
(b)(1) In the event that the borrower prepays a loan under
paragraph (a) of this section using, directly or indirectly, tax exempt
financing, the discount shall be adjusted to ensure that the borrower
receives a benefit that is no greater than the benefit the borrower
would receive if the borrower used financing that was not tax exempt.
The borrower shall certify in writing whether the financing will be tax
exempt.
(2) The discount rate established in paragraph (a) of this section
shall be adjusted for a tax exempt financing by substituting for the
``I'' term in the discount rate formula, a discount rate equal to the
interest rate(s) published pursuant to 7 CFR 1714.5, determination of
interest rates on municipal rate loans. This is the interest rate
established for the new REA loan program which is based on municipal
interest rates for issues of comparable maturity. No interpolation or
average will be used. If a note is to be prepaid under this subpart and
is subject to this tax exempt adjustment, the discount rate will be
determined from the published table in the Federal Register. For
example, if the note to be discounted matures in the year 1999 then the
discount rate will be the interest rate for the year 1999. REA will
publish a schedule of interest rates for municipal rate loans in the
Federal Register at the beginning of each calendar quarter. The
published rates in effect eight business days prior to closing will be
used for the discount rates. All notes to be prepaid that have
remaining years to maturity of more than 20 years will be discounted at
the interest rate in effect for new REA municipal rate loans of
comparable maturity at the time of closing.
Sec. 1786.154 Qualified Notes.
An eligible borrower may prepay Qualified Notes under this subpart
at the discounted present value. A Qualified Note is a note evidencing
an REA electric loan, all advances of which were made prior to May 1,
1992, or not less than 2 years prior to the date of prepayment closing.
See Secs. 1786.155(a)(3) and 1786.158 (h) and (j).
Sec. 1786.155 Eligible borrower.
(a) To be eligible to prepay an electric loan under this subpart,
the borrower must be in compliance with the following: (1) The borrower
shall be current on all payment obligations on outstanding loans made
or guaranteed by REA. For the purpose of determining eligibility for
prepayment, a default by a power supply borrower from which a
distribution borrower purchases wholesale power shall not be considered
a default by the distribution borrower;
(2) There shall exist no material defaults under the borrower's REA
Loan Contract and Mortgage;
(3) The borrower shall have expended all funds advanced pursuant to
the REA Loan Contract for the purposes for which such funds were
advanced. A borrower will not be eligible to prepay under this subpart
if it has any funds advanced pursuant to the REA Loan Contract in its
Construction Fund Account; and
(4) The borrower shall be current on all obligations under any
wholesale power contract with an REA financed power supply borrower.
(b) The eligibility of borrowers that have had any indebtedness
representing loans made or guaranteed by REA restructured shall be
determined on a case by case basis considering the terms and conditions
of the restructuring agreement.
Sec. 1786.156 Application procedure.
Any borrower seeking to prepay Qualified Notes under this subpart
should apply to the appropriate REA Regional Director or the Director
of the Power Supply Division. The application shall provide the
following: (a) Borrower's REA designation;
(b) Borrower's name and address;
(c) A certified copy of a resolution of the board of directors of
the borrower that the borrower wishes to enter into a prepayment
agreement providing for the prepayment of all or a portion of its
Qualified Notes;
(d) Listing of each Qualified Note to be prepaid by loan
designation, REA account number, advance date, maturity date, original
amount, and outstanding principal balance;
(e) Evidence that the borrower has the ability to obtain the
financing necessary to prepay its Qualified Notes listed in paragraph
(d) of this section and identification of the source of financing and
the need if any of obtaining a lien accommodation from REA; and
(f) Such additional information as the Administrator may request.
Sec. 1786.157 Approval of applications.
(a) Ordinarily, within 30 days of receipt, an application will be
reviewed and the borrower will be notified as to whether the
application has been approved. If the application has not been
approved, the borrower will be informed as to the reasons. If the
application is approved the borrower shall thereafter be provided with
a prepayment agreement for execution.
(b) The Administrator may limit the number of applications approved
and closings scheduled from time to time, taking into account, among
other matters, administrative considerations of the REA.
Sec. 1786.158 Terms and conditions of prepayment agreement.
Upon receipt of a satisfactory application, REA shall provide to
the borrower for its execution a prepayment agreement, in form and
substance satisfactory to REA, which may include the following: (a)
Provide for the prepayment of one or more Qualified Notes from time to
time, but no more than two closings may be scheduled in any calendar
year unless a third closing is for the prepayment of all outstanding
electric loans of the borrower;
(b) Set forth procedures and forms through which the borrower will
notify the Government of each election it makes to prepay certain
Qualified Notes upon a requested closing date and the Government will
notify the borrower of the established closing date and prepayment
amount for the Qualified Notes for each closing;
(c) Reserve to the Administrator the right to reschedule closing
dates to meet administrative considerations;
(d) Set forth closing requirements identifying the location and
manner of payment, and all documentation and information to be
delivered prior to or at closing, including opinions of counsel and
certificates from the borrower;
(e) Provide for notice by either telephone or facsimile to be given
by REA to the borrower not more than 8 nor less than 3 business days
before a scheduled closing date of the amount to be paid at closing
which shall include all accrued interest and the discounted present
value of the Qualified Notes to be prepaid;
(f) Provide for notice of the 120 month period during which the
borrower's eligibility for direct or insured loans will be restricted;
(g) Set forth representations and warranties;
(h) Require the borrower to prepay each Qualified Note specified in
full;
(i) Require the borrower to identify the source of the financing
that will be used directly or indirectly to refinance the Qualified
Notes. If the source is other than internally generated funds, the
borrower must certify in writing whether such financing will be tax
exempt, and if tax exempt financing will be used, furnish all
information on the terms and conditions of the financing as REA may
require;
(j) Require the borrower to rescind the unadvanced balance of all
outstanding electric loans as of the date of initial closing;
(k) Require the borrower, if it is a party to a wholesale power
contract with a power supply borrower, to provide the Administrator
with such assurances as the Administrator may require that it is in
compliance with and will continue to comply with its obligation to such
power supply borrower;
(l) Provide REA, if the Administrator determines it necessary, with
security for all outstanding rural development loans and amendments to
any outstanding rural development loan agreements in form and
substance, and on terms and conditions, satisfactory to REA;
(m) Prescribe remedies for violating the terms and conditions of
the prepayment agreement;
(n) Provide for termination by REA of the right for the borrower to
prepay thereunder;
(o) Provide evidence that any approvals required from any
supplemental lender have been obtained; and
(p) Set forth such other terms and conditions as the Administrator
shall deem appropriate.
Sec. 1786.159 Initial closing.
(a) Upon receipt of the prepayment agreement, the borrower may
submit, pursuant to the terms of the prepayment agreement, a closing
request which shall request a closing date no less than 30 business
days from the date of the request.
(b) The Government will respond to the borrower's closing request
by delivering a preclosing notice to the borrower not less than 10
business days prior to the date which the Government, after reviewing
the borrower's closing request, selects as a closing date.
Sec. 1786.160 Subsequent closings.
(a) Each subsequent prepayment after the initial closing shall be
facilitated with the submission of an additional closing request by the
borrower. Each closing request must request a closing date no less than
30 business days from the date of the request.
(b) The Government will respond to each subsequent closing request
by delivering a preclosing notice to the borrower not less than 10
business days prior to the date which the Government, after reviewing
the borrower's closing request, selects as a closing date in each case.
Sec. 1786.161 Return of Qualified Notes and release of lien.
Upon payment to REA at closing of the full amount specified in the
notice delivered by REA to the borrower pursuant to the terms of the
prepayment agreement (see Sec. 1786.158(e)), REA will deliver to the
borrower at closing those Qualified Notes which have been paid in full
at such closing, and upon payment and discharge of all outstanding REA
debt obligations by the borrower, REA will deliver to the borrower at
the final closing a release of lien prepared by the borrower pursuant
to the terms of the prepayment agreement.
Sec. 1786.162 Outstanding loan documents.
(a) Except as expressly provided in this subpart, the borrower
shall comply with all provisions of its REA Loan Contract, its
outstanding notes issued to REA, and the REA Mortgage.
(b) Nothing in this subpart shall affect any rights of supplemental
lenders under the REA Mortgage, or other creditors of the borrower.
(c) Nothing in this subpart shall prohibit a borrower from making
prepayments of any loans pursuant to the RE Act in accordance with the
terms of such loans.
Sec. 1786.163 Existing wholesale power contracts.
(a) If the borrower is a party to a wholesale power contract with a
power supply borrower financed pursuant to the RE Act, the
Administrator may require that the borrower and the power supply
borrower enter into a supplement to the outstanding wholesale power
contract providing substantially as follows:
Sample Contract Terms
So long as any of the notes evidencing secured loans of the
power supply borrower are outstanding, the borrower will not,
without the approval in writing of the power supply borrower and the
Administrator, take or suffer to be taken any steps for
reorganization or dissolution, or to consolidate with or merge into
any corporation, or to sell, lease or transfer (or make any
agreement therefor) all or a substantial portion of its assets,
whether now owned or hereafter acquired. The power supply borrower
will not unreasonably withhold or condition its consent to any such,
reorganization, dissolution, consolidation, or merger, or to any
such sale, lease or transfer (or any agreement therefor) of assets.
The power supply borrower will not withhold or condition such
consent except in cases where to do otherwise would result in rate
increases for the other members of the power supply borrower or
impair the ability of the power supply borrower to repay its secured
loans in accordance with their terms, or adversely affect system
performance in a material way. Notwithstanding the foregoing, the
borrower may take or suffer to be taken any steps for reorganization
or dissolution or to consolidate with or merge into any corporation
or to sell, lease or transfer (or make any agreement therefor) all
or a substantial portion of its assets, whether now owned or
hereafter acquired without the power supply borrower's consent, so
long as the borrower shall pay such portion of the outstanding
indebtedness on the power supply borrower's notes or other
obligations as shall be determined by the power supply borrower with
the prior written consent of the Administrator and shall otherwise
comply with such reasonable terms and conditions as the
Administrator and power supply borrower may require either: (1) To
eliminate any adverse effect that such action seems likely to have
on the rates of the other members of the power supply borrower, or
(2) To assure that the power supply borrower's ability to repay
the secured loans and other obligations of the power supply borrower
in accordance with their terms is not impaired.
The Administrator may require, among other things, that any
payment owed under (2) of the preceding sentence that represents a
portion of the power supply borrower's indebtedness on Notes shall
be paid by the borrower in the manner necessary to accomplish a
defeasance of those obligations in accordance with the loan
documents relating thereto, or be paid directly to the holders of
the Notes for application by them as prepayments in accordance with
the provisions of such documents, or be paid to the power supply
borrower and held and invested in a manner satisfactory to the
Administrator.
[End of sample contract terms]
(b) The Administrator may exempt a borrower from the requirement to
enter into a supplement to its outstanding wholesale power contract if
the Administrator determines that such requirement is burdensome and
unnecessary in light of the provisions of the existing wholesale power
contract, other security arrangements of the power supply borrower, and
any other relevant facts and circumstances. Normally such exemption
will be granted only with the concurrence of the power supply borrower.
Sec. 1786.164 Loan fund audit.
In the event that a borrower shall prepay all its outstanding
electric loans REA shall have the right to audit within six (6) months
of closing transactions involving the REA Construction Fund Account
established and maintained by the borrower pursuant to the terms of the
REA Loan Contract and to inspect all books, records, accounts, and
other documents and papers of the borrower. Should REA determine that
the borrower has made disbursements of funds advanced pursuant to the
REA Loan Contracts which do not comply with the requirements thereof,
the borrower shall be required to pay the REA an amount equal to the
difference between the amount which the borrower prepaid under this
subpart with respect to such advances, and the amount which the
borrower would otherwise have been required to return to the REA as a
result of noncompliance if the borrower had not prepaid such advances,
plus interest. (See 7 CFR part 1721, Post-Loan Policies and Procedures
for Insured Electric Loans.)
Sec. 1786.165 Reporting.
Borrowers that no longer have any loans made or guaranteed by REA
and are considering applying for other financial assistance pursuant to
the RE Act are encouraged to file the end-of-year operating report, REA
Form 7.
Sec. 1786.166 Approvals.
The borrower shall be responsible for obtaining all approvals
necessary to consummate the transaction as required by the prepayment
agreement, including such approvals as may be required by regulatory
bodies and other lenders.
Sec. 1786.167 Restrictions to additional REA financing.
(a) No borrower that prepays an electric loan at a discount as
provided under this subpart may apply for or receive direct or insured
loans during the 120 months from the most recent closing date, except
at the discretion of the Administrator. During the 120 month period the
Administrator may consider providing an insured loan if, among other
matters, it is necessary to assure repayment of, or protect the
Government's security for any outstanding loans or loan guarantees, or
the borrower's system has suffered severe physical plant related damage
due to conditions beyond its control and the borrower is unable to
obtain financing at reasonable terms to restore the system from non-REA
sources, including the Federal Emergency Management Agency, and from
private sources. Upon expiration of the 120 months, such borrowers may
apply for direct or insured loans in the same manner as other borrowers
provided that such borrowers may not apply for direct or insured loans
for facilities, construction of which commenced prior to the expiration
of the 120 months.
(b) Borrowers that prepay their direct or insured REA loans under
this subpart remain eligible for certain types of financial assistance
under the RE Act, including loan guarantees and rural development
loans.
Sec. 1786.168 Borrowers who prepaid under this part prior to October
21, 1992.
(a) A borrower that had prepaid, prior to the date of enactment of
Public Law 102-428 (106 Stat. 2183) on October 21, 1992, at a discount
rate as provided at 7 CFR part 1786, subpart C: (1) Shall not be
eligible except at the discretion of the Administrator as stated in
paragraph Sec. 1786.167(a), to apply for or receive direct or insured
loans during the 180-month period beginning on the date of the
prepayment; and
(2) Shall not be eligible to apply for or receive direct or insured
loans from REA until the borrower has repaid to the REA the sum of: (i)
The amount (if any) by which the discount the borrower received by
reason of the prepayment exceeds the discount the borrower would have
received had the discount been based on the cost of funds to the
Department of the Treasury as calculated at Sec. 1786.153 at the time
of the prepayment; and
(ii) Interest on the amount described in paragraph (a)(2)(i) of
this section for the period beginning on the date of the prepayment and
ending on the date of the repayment, at a rate equal to the average
annual cost of borrowing by the Department of the Treasury. This rate
will be calculated first on the date of prepayment and at one year
intervals from that date based on the same U.S. Treasury issues
published in the Federal Reserve Statistical Release closest to that
date. The Treasury rate of interest to be applied for each year will be
the rate for the Treasury issue of comparable maturity to the number of
years from the prepayment date to the repayment date and at one year
intervals thereafter.
(b) If a borrower and the Administrator have entered into an
agreement with respect to a prepayment occurring before October 21,
1992, this section shall supersede any provision in the agreement
relating to the restoration of eligibility for loans under the RE Act.
(c) Borrowers who prepaid prior to October 1, 1987, are eligible
for assistance under the RE Act in the same manner as other borrowers
with respect to loan guarantees and the rural development loans.
(d) During the 180 month period described in paragraph (a)(1) of
this section the Administrator may consider providing an insured loan,
if the conditions described in Sec. 1786.167(a) exist.
(e) Borrowers may not apply for direct or insured loans for
facilities, construction of which commenced prior to the expiration of
the 180 month period described in paragraph (a)(1) of this section.
Sec. 1786.169 Liability.
It is the intent of this subpart that any failure on the part of
REA to comply with any provisions of this subpart, including without
limitation, those provisions setting forth specified timeframes for
action by REA on applications for prepayments or closing requests,
shall not give rise to liability of any kind on the part of the
Government or any employees of the Government including, without
limitation, liability for damages, fees, expenses or costs incurred by
or on behalf of a borrower, private lender or any other party.
Sec. 1786.170 Prepayment of loans approved after December 20, 1993.
[Reserved]
Secs. 1786.171-1786.199 [Reserved]
Dated: March 16, 1994.
Karl N. Stauber,
Acting Under Secretary, Small Community and Rural Development.
[FR Doc. 94-6647 Filed 3-18-94; 10:41 am]
BILLING CODE 3410-15-P
