A $150 Million Bond Clash Jolts U.S. Debt Market for Farmersby
Bond recall discord hinges on new capital-rule interpretation
`Punishing' investors who stepped up during financial crisis
The credit market that funds banks serving America’s farmers, ranchers and loggers has been rattled by a move that could leave investors with unexpected losses on their investments.
A cooperative bank that’s a member of the 100-year-old Farm Credit System is facing backlash over a plan to buy back at par about $405 million of bonds sold in April 2008, according to people with knowledge of the matter. CoBank ACB is seeking to redeem the notes paying almost 8 percent, which were trading at 112.5 cents on the dollar, citing a provision that is disputed by its lenders.
Creditors who stand to lose money on the repurchase have complained to the bank and lobbied its regulator, said the people, who asked to not be identified as the information isn’t public. The move hinges on the interpretation of a rule released by the Farm Credit Administration last month that is aimed at redefining capital requirements.
Investors are concerned that if CoBank is successful, AgriBank FCB, another member of the system, would be able to retire its $500 million of unsecured bonds, which are trading at 120 cents, by its next interest-payment date in July. That could amount to losses of more than $150 million on the two series of notes.
"We are disappointed and angered by CoBank’s hastily made decision to call the bonds," John Villela, a portfolio manager at Longfellow Investment Management, said in an interview. "They are effectively punishing the same investor group who injected cash to them a month after the collapse of Bear Stearns.”
Longfellow, which manages about $7.8 billion is assets, holds the bonds being redeemed by the bank.
Creditors have gathered on calls since March 11, the date CoBank announced its intent to recall the bonds, with more than 80 percent of the holders of the CoBank bonds participating, the people said. Nationwide Mutual Insurance Co. and Capital Group Cos. are two of the biggest holders of the bonds, according to data compiled by Bloomberg.
The Farm Credit System is a network of cooperatively owned banks set up in 1916 to provide credit and other financial services to the rural and agricultural sector. The FCA’s rule updates capital requirements and redefines what constitutes capital in the calculation of a bank’s leverage ratio.
CoBank has argued that the subordinated bonds will no longer be considered capital for that test, and that -- as per its bond offering circular from 2008 -- is a good enough trigger for it to pull the bonds.
“We believe the redemption is consistent with the terms of the notes and we will redeem the notes as previously announced," CoBank’s Chief Financial Officer David Burlage said in an e-mailed statement. "Investors will get paid principal in full and accrued interest to the date of redemption.”
Holders disagree with CoBank’s view that the bonds will no longer meet the capital requirement, and also question whether the change can be invoked before the law becomes applicable, the people said.
In part it’s a question of timing. The bond allows for redemptions only on interest-payment dates. So if CoBank can’t buy back the bonds on April 15, it would have to wait until Oct. 15, giving investors more time to square their accounts.