Strategies for Cooperatives
in Turbulent Times
Farmer Cooperative Conference
Amy Gales, CoBank Central President
November 18, 2008
Discussion
 What lead to the financial melt
down?
 Main Street meets Wall Street
 How is CoBank faring?
 What strategies can cooperatives
use to succeed in turbulent
economic times?
Stock Market Quote of the Week:
“This is worse than a divorce;
I’ve lost half my net worth and I
still have a husband.”
Causes of the Financial Crisis

Fed lowered rates and fueled credit demand

Lending practices were out of control
 Mortgage lenders were wildly
aggressive
 Birth of the subprime market$6 billion issued in 2006

Loans were securitized and sold around the world
 No incentive for lenders to make good loans
Causes of the Financial Crisis
 Rating agencies failed to quantify risk
 AAA ratings given—same as government
debt
 New investors entered the market
 Hedge funds
 Institutional loan funds
 Investment strategies were not prudent
MAIN STREET meets WALL STREET
 Real estate values
declined and
adjustable interest
rates kicked in
MAIN STREET meets WALL STREET
MAIN STREET meets WALL STREET
 High profile failures--write-offs, lack of liquidity


Bail out for Fannie and Freddie
Massive commercial and investment bank write-offs--$1
trillion of losses pulled $10 trillion of capacity from the
market
Financial Melt Down
 Global de-leveraging
 Crisis of ……..
 Liquidity
 Capital
 Confidence
Pricing Up
Average All-in New-issue First-Lien Spread of BB/BB- Institutional Loans
Assumes upfront fee is amortized evenly over a three-year assumed life;
Upfront fee includes original issue discount
L+500
As of 10/5/06 LCD began using Corporate Credit Ratings by S&P and Corporate Family Ratings by Moody’s for rated spread and rated upfront
fee calculations
L+400
L+300
L+200
1Q
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M 9
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M 0
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Se 1
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Ja 1
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M 2
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Se 2
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Ja 2
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M 3
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Se 3
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Ja 7
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M 8
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L+100
Straight Spread
Upfront fee over three year assumed maturity
Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.; Source: Standard & Poor’s LCD;
www.standardandpoors.com; on Bloomberg: LCDZ <go>
Current Credit Market Conditions
 Commercial Banks





Flight to quality
Tighter covenants
Need to raise capital?
Pricing to risk
Reluctant to buy into new credits
 Farm Credit Institutions
 Good portfolio growth and quality
 Reserving liquidity for core borrowers
Real Economy Heading Into Recession
Lagging Twelve-Month Default Rate by Number of Issuers & Rolling Twelve-Month Number of Index
Defaults
Source: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index
Rolling 12-months Number of Defaults
Lagging 12-months Default Rate by Number of
Issuers
9%
40
8%
35
7%
30
6%
25
5%
20
4%
10
2%
5
1%
0
0%
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15
Twelve-months Ended
Copyright © 2008, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc.; Source: Standard & Poor’s LCD;
www.standardandpoors.com; on Bloomberg: LCDZ <go>
How is CoBank Faring?
 Mission bank balanced with safety
and soundness practices
 Confidence in the market--GSE
 CoBank has capital and capacity
 Not immune from the financial crisis
 Cost of funds/ interest rates are going up
 Loan structure will be more important
 As credit needs grow, more difficult to
find market partners
CoBank Loans Outstanding
Capital Ratios
Permanent Capital Ratio
(7.0% regulatory minimum)
16%
14%
15.1%
Core Surplus Ratio
(3.5% regulatory minimum)
13.7%
13.7%
12.1%
11.4%
12%
10.9%*
10%
8%
6%
5.7%
6.3%
5.9%
5.1%
4.9%
5.8%**
4%
2%
0%
2003
2004
2005
2006
2007
6/30/2008
*July 2008 issuance of $200 million of non-cumulative preferred stock will increase this ratio by approximately
80 basis points.
** Effective 1/1/08, FCA allowed inclusion of a portion of common stock and participation certificates, increasing
core surplus ratio by 165 basis points. July 2008 issuance of $200 million of non-cumulative preferred stock will
increase this ratio by approximately 50 basis points.
Financial Strength
Total Loan & Lease Volume
$60
$49.4
$ in billions
$50
$40.5
$40
$30
$33.9
$33.1
$24.8
$24.0
2003
2004
$26.3
$20
$10
$0
2005
2006
2007
6/30/08 6/30/07
$ in millions
Net Earnings
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
$416
$335
$261
$275
$308
$298
$205
2003
2004
2005
2006
2007
YTD
YTD
6/30/08 6/30/07
Asset Quality
Net Charge-Offs (Recoveries) /
Average Loans and Leases
Nonaccrual Loans and Leases /
Total Loans and Leases
1.29%
0.27%
0.77%
0.12%
0.09%
0.46%
0.04% *
0.01%
0.25%
-0.04%
0.15%
0.04%
2003
2004
2005
2006
2007
6/30/2008
2003
Allowance for Credit Losses /
Nonaccrual Loans and Leases
2004
2005
2006
2007
6/30/2008
Allowance for Credit Losses /
Total Loans and Leases
1.68%
3020%
1.82%
1.66%
1.32%
1.10%
0.89%
130%
237%
2003
2004
* Annualized
365%
2005
577%
531%
2006
2007
6/30/2008
2003
2004
2005
2006
2007
6/30/2008
Top 10
Strategies for Volatile Times
10. Build capital to handle the speed bumps
 Manage leverage
 Improve working capital
9. Generate strong profit
 No “sacred cows”
 Pull the trigger when margin objective met
8. Enhance ST and LT planning
 Understand the cost of doing business
 Spend money on the “right” things
Top 10
Strategies for Volatile Times
7. Block and tackle well
6. Heighten risk management
 Top shelf contracting
 New level of procedures and controls
 Manage price risk
5. Retain, grow and attract excellent talent
4. Provide the right leadership
 CEO vs. General Manager, CFO vs. Controller, Board
that understands responsibilities and adds value
Top 10
Strategies for Volatile Times
3. Effectively communicate
 Internally, externally, related parties
 Keep your banker informed
2. Healthy to challenge the “old way”
 Be a seller not a hoarder of grain
 Add outside directors to add value
1. Watch for opportunities—there will
be many!
Questions?