2009 Farmers Cooperative
Conference
Credit Markets Update
November 9, 2009
Debt Market Overview
 Economy
emerging from recession, but
 Expectation
for low-growth economic recovery
 Strong
recent rally in equity markets, relatively strong
quarterly earnings
 Sidelined
cash looking for risk beyond US Treasuries
 Leveraged
finance (loans and bonds) rallying as well
 YTD net HY bond inflows of $15.6 billion, highest since 2003
 Bond market adding technical support to loan market through deal refinancing
 Secondary market trading spreads have narrowed off of unprecedented high levels at
beginning of the year but still remain very high for any market cycle
 Dispersion of spreads for any given credit profile very wide, lack of market consensus
on pricing
2
Debt Market Overview

Loan market still somewhat sluggish due to on-going problems of banks
 Consumer lending portfolios tied to deteriorating unemployment fundamentals
 Commercial real estate portfolios also deteriorating now
 Corporate loan demand is off as well as companies are slashing cap-x
budgets
 Corporate defaults are on the rise
 Very large debt maturities over next five years
3
Percent of Leveraged Loans
in Payment Default or Bankruptcy
15%
11.3%
12%
9.9%10.0%
9%
7.0%
7.4%
6%
3.6%
2.6%
1.9%
4.0%
3%
1.0%
1.0%
0.0%
3.7%
0.6%
Y
E1
Y 99
E1 6
Y 997
E1
Y 998
E1
Y 99
E2 9
Y 000
E2
Y 001
E2
Y 00
E2 2
Y 003
E2
Y 004
E2
Y 00
E2 5
Y 006
E2
Y 0
10 E2 07
/1 00
6/ 8
20
09
0%
As of
4
High Yield Bond and Lev. Loan Maturities
($billions)
350
300
250
200
150
100
50
0
2009
2010
2011
2012
Institutional Loans
5
2013
2014
2015
High Yield Bonds
2016
Loan Spreads Over LIBOR for BB/BBAverage New-Issue Pro Rata & Weighted Average First-Lien
Institutional Spread of BB/BB- Loans
L+600
L+500
L+400
L+300
L+200
Ja
n98
Ju
l- 9
8
Ja
n99
Ju
l- 9
9
Ja
n00
Ju
l- 0
0
Ja
n01
Ju
l- 0
1
Ja
n02
Ju
l- 0
2
Ja
n03
Ju
l- 0
3
Ja
n04
Ju
l- 0
4
Ja
n05
Ju
l- 0
5
Ja
n06
Ju
l- 0
6
Ja
n07
Ju
l- 0
7
Ja
n08
Ju
l- 0
8
Ja
n09
Ju
l- 0
9
L+100
Pro Rata
Institutional
6
Ja
n9
Ju 8
n9
No 8
v9
Ap 8
r- 9
Se 9
p9
Fe 9
b00
Ju
l- 0
De 0
cM 00
ay
-0
Oc 1
t-0
M 1
ar
-0
Au 2
g02
Ja
n0
Ju 3
n0
No 3
v0
Ap 3
r- 0
Se 4
p0
Fe 4
b05
Ju
l- 0
De 5
cM 05
ay
-0
O 6
ct0
M 6
ar
-0
Au 7
g07
Ja
n0
Ju 8
n0
No 8
v0
Ap 8
r- 0
Se 9
p09
Loan Spreads Over LIBOR for B+/B
Average New-Issue Pro Rata & Weighted Average First-Lien
Institutional Spread of B+/B Loans
L+550
L+450
L+350
L+250
L+150
Pro Rata
Institutional
7
M
ar
-9
Au 6
g96
Ja
n97
Ju
n9
N 7
ov
-9
7
Ap
r98
Se
p9
Fe 8
b99
Ju
l-9
D 9
ec
-9
M 9
ay
-0
O 0
ct
-0
M 0
ar
-0
Au 1
g01
Ja
n0
Ju 2
n0
N 2
ov
-0
Ap 2
r03
Se
p0
Fe 3
b04
Ju
l-0
D 4
ec
-0
M 4
ay
-0
5
O
ct
-0
M 5
ar
-0
Au 6
g06
Ja
n0
Ju 7
n0
N 7
ov
-0
Ap 7
r08
Se
p08
Fe
b09
Ju
l-0
9
Middle Market Spreads (Cash Flow < $50MM)
L+600
L+500
Institutional
L+400
L+300
Pro Rata
L+200
8
Ja
M n-9
ay 7
Se -97
p
Ja -97
M n-9
a 8
Sey-98
p
Ja -98
M n-9
a 9
Sey-99
p
Ja -99
M n-0
ay 0
Se -00
p
Ja -00
M n-0
a 1
Sey-01
p
Ja -01
n
M -0
ay 2
Se -02
p
Ja -02
M n-0
ay 3
Se -03
p
Ja -03
M n-0
a 4
Sey-04
p
Ja -04
n
M -0
ay 5
Se -05
p
Ja -05
M n-0
a 6
Sey-06
p
Ja -06
M n-0
a 7
Sey-07
p
Ja -07
M n-0
ay 8
Se -08
p
Ja -08
M n-0
a 9
Sey-09
p09
Secondary Market Trading Spreads By Rating
L+3200
L+3000
L+2800
L+2600
L+2400
L+2200
L+2000
L+1800
L+1600
L+1400
L+1200
L+1000
L+800
L+600
L+400
L+200
L+0
B Loans
All BB/B Loans
BB Loans
9
Deal Structure Trends

Lower leverage, higher equity levels required

Tighter covenants and security packages
 More asset-based financing
 Borrowing bases

Shorter maturity loans

Very few dividend recapitalization deals

Original-issue discounts, higher up-front fees

Libor floors often set at 2 to 2.5%

More rigorous excess cash flow sweeps
10
Average Debt to Cash Flow Multiples
10.0x
8.8
8.0x
7.1
6.7
6.0x
5.3
5.3 5.2
5.0 5.1
5.8 5.6
5.2
4.9
4.5
4.0
4.0x
3.9
3.7 3.8
4.4
4.2 4.3
4.3
3.8
3.6
4.1 3.9
3.9
3.1
3.6 3.6 3.5
4.1 3.9
4.3 4.4
3.7 3.7
3.5 3.6
2.0x
19
8
19 7
8
19 8
8
19 9
9
19 0
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
1Q 8
0
2Q 8
0
3Q 8
0
4Q 8
Oc 08
No t-08
v
De - 08
cJa 08
n
Fe - 09
b
M -09
ar
Ap -09
M r- 09
ay
Ju 09
nJu 09
Au l- 09
g
M S - 09
E ep
10 -0
/2 9
2/
09
0.0x
FLD/EBITDA
SLD/EBITDA
Other Sr Debt/EBITDA
11
Sub Debt/EBITDA
Food and Beverage Company Credit Stats
6.0x
4.0x
2.0x
0.0x
Debt/EBITDA
2000 (26)
2006 (39)
Senior Debt/EBITDA
2001 (22)
2007 (22)
2002 (29)
2008 (17)
EBITDA/Cash Interest
2003 (38)
1Q-3Q09 (9)
12
EBITDA - Capex/Cash
Interest
2004 (41)
2005 (28)
Credit Crisis Impact on Agribusiness

Financing liquidity and working capital

Volatile grain, petroleum and fertilizer prices

Impact on agricultural futures prices
 Financial investors’ positive long term view
 Funds flow related volatility: hedge funds, commodity index funds and ETFs
 Commodities as a low correlation asset class

Deflation bad for commodities, inflation good

How long will deflation last?

Fiscal and monetary stimulation vs. recession and deleveraging
13
Investor Focus and Managing Bank Groups

Credit risk
 Liquidity requirements and sources
 Leverage, debt service coverage
 Asset quality and collateral

Risk management
 More disclosure, due-diligence questioning
 Hedging policies and procedures
• Written policies that are updated regularly
• Board approved policies
• Hedging performance, earnings/cash flow volatility
14
Investor Focus and Managing Bank Groups

Communication
 More updates with bank groups
 Improved forecasting models, compliance reporting
 Many companies making the effort to visit their key banking relationships
 Understanding the credit underwriting process

Loyalty in awarding non-lending business
 Balance best product providers with largest financial commitments
 Many banks are demanding about “other business” before committing their
balance sheets
15
Investor Segments

Commercial banks
 Supportive of top tier relationships
 Reconsidering desired business lines, markets, industries, corporate
relationships
 Distracted by mergers and comprehensive restructuring events
 Focused on
• Credit quality and risk
• Conservative structures: shorter tenors, tighter covenants, cash flow sweeps,
hedging requirements, borrowing bases, and security packages
• Loan purpose important
• Higher loan spreads and fees, OID discounts, Libor floors
• Ancillary business
 Some banks implementing capital allocation committees in addition to credit
committees as second level of relationship evaluation
16
Investor Segments

Insurance companies





Private placement market following recovery of public bond market
Selectively returning to the investment grade market
Sub-investment grade market (NAIC 3 and below) effectively non-existent
Only very small allocations for floating rate market
CLOs
 Enjoying strong technical factors (loans converting to bonds), loan repayment net inflows
 Loan funding costs still very high
 Some fund merger/consolidation and liquidation

Hedge funds and private equity firms
 More stable now
 Deleveraging at slower pace
 Shifting emphasis to bankruptcy, restructuring, advisory, and distressed trading
 Merger and acquisition activity slowly returning
17
Farm Credit System

Generally FCS institutions have strong capitalization ratios

Relatively clean loan portfolios with historically high credit statistics going
into the credit crisis

Relatively strong GSE funding source

Virtually all buy-side participants open for new business

Most buy-side groups have annual asset growth objectives of mid to
upper single digits

Some credit stress in dairy, ethanol, protein, and building products
sectors
18
Farm Credit System

High degree of familiarity with all the agribusiness segments

Long term dedication to the industry (commit and hold investors)

Flexible to fund a broad range of credit profiles

Longer tenors and customized, one-off structures

Large, early FCS commitments add significant “industry-savvy”
momentum to the deal

Quick response time, localized decision making
19
Investor Selection Criteria

Industry expertise: experience with specific agribusiness segments and
commodities

Comfort with financing commodity cycles

Consistent underwriting standards and market presence

Regional presence, relationship with producers/members

Investor relationship with borrower and CoBank

Voting history on amendments/waivers

Unique structures, quick response time

Capacity: generally have view that the fewer the investors the better
20
Credit Market Outlook

Global Unwinding of Leverage
 Banks, hedge funds, private equity, and consumers, all in process of
unwinding leverage
 Rapid unwinding of leverage associated with the structured finance
(securitization) industry
 Government sector taking on new debt, risk of crowding-out of private sector
 Derivative exposure concentrations still unknown

Commercial/investment banks likely to remain under extreme pressure
through 2009 and likely into 2010
 Higher minimum capital requirements for all financial institutions likely
 Need to raise more capital, who will provide it?
 Rethinking risk management models
 Substantial internal restructuring and deleveraging
 How will regulatory environment change?
21
Credit Market Outlook

Fundamentals of real estate and consumer credit problems likely to have
a long tail and tied to unemployment dynamics and deleveraging

Lender perspective that the economy is poised for recovery. But will it be
a jobless recovery?

Expectation of higher credit losses in many segments

Credit spreads likely to tighten from current levels as economy continues
to recover but refinancing calendar likely to put floor on spreads

Multiple levels of uncertainty: global economy, role of government
(ownership), credit availability, dollar value, financial strength of
institutions/counterparties, derivative exposure concentrations, risk
management (model) risks, regulatory changes, etc.
22
CoBank Capital Markets Transactions
US$250 Million Facility
US$1,600 Million Facilities
US$450 Million Facility
CoBank
CoBank
CoBank
CoBank
Lead Arranger,
Administrative &
Bid Agent
Lead Arranger,
Administrative Agent &
Co-Syndication Agent
Lead Arranger,
Administrative Agent &
Syndication Agent
Lead Arranger &
Administrative Agent
US$500 Million Facility
US$375 Million Facility
US$160 Million Facility
US$250 Million Facility
CoBank
CoBank
CoBank
CoBank
Lead Arranger &
Lead Arranger &
Administrative Agent
Lead Arranger
Lead Arranger
US$300 Million Facility
US$85 Million Facility
US$1,000 Million Facility
CoBank
CoBank
Private Placement Agent
Lead Arranger &
Administrative Agent
US$150 Million Facility
CoBank
CoBank
Lead Arranger &
Administrative Agent
Lead Arranger &
Administrative Agent
US$400 Million SPV
Administrative Agent
23