Post-Loan Policies and Procedures Common to Guaranteed and Insured Loans

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1744

RIN 0572-AB53

Post-Loan Policies and Procedures Common to Guaranteed and

Insured Loans

AGENCY: Rural Utilities Service, USDA.

ACTION: Proposed rule.

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SUMMARY: Recent changes in the telecommunications industry, including

deregulation and technological developments, have caused Rural

Utilities Service (RUS) borrowers and other organizations providing

telecommunications services to consider undertaking projects that

provide new telecommunications services and other telecommunications

services not ordinarily financed by RUS. The ability of

telecommunications providers to compete in an expanding number of

telecommunications services may be critical to their financial strength

and stability. Although some of these services may not be eligible for

financing under the Rural Electrification Act of 1936 (RE Act), these

services may nevertheless advance RE Act objectives where the borrower

obtains financing from private lenders. Rural subscribers will be the

beneficiaries of these services and, overall, the borrowers' financial

strength and the assurance of repayment of outstanding Government debt

will be improved as a result of providing such telecommunications

services. To facilitate the financing of those services, RUS is willing

to consider accommodating the Government's lien on telecommunications

borrowers' systems or subordinating the Government's lien on after-

acquired property of telecommunications borrowers.

DATES: Written comments on this proposed rule must be received by RUS

or carry a postmark or equivalent by February 14, 2000.

ADDRESSES: Written comments should be addressed to Roberta D. Purcell,

Assistant Administrator, Telecommunications Program, Rural

[[Page 69947]]

Utilities Service, U.S. Department of Agriculture, 1400 Independence

Avenue, SW., STOP 1590, Room 4056, South Building, Washington, DC

20250-1590. RUS requests a signed original and three copies of all

comments (7 CFR part 1700). All comments received will be made

available for public inspection at room 4056, South Building,

Washington, DC, between 8 a.m. and 4 p.m. (7 CFR part 1.27(b)).

Telephone number (202) 720-9554.

FOR FURTHER INFORMATION CONTACT: Jonathan P. Claffey, Deputy Assistant

Administrator, Telecommunications Program, Rural Utilities Service,

U.S. Depatment of Agriculture, 1400 Independence Avenue, SW., STOP

1590, Room 4056, Washington, DC 20250-1590. Telephone number (202) 720-

9556.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been determined to be not significant for purposes of

Executive Order 12866 and therefore has not been reviewed by the Office

of Management and Budget (OMB).

Executive Order 12372

This rule is excluded from the scope of Executive Order 12372,

Intergovernmental Consultation, which may require a consultation with

State and local officials. A final rule related Notice entitled,

``Department Programs and Activities Excluded from Executive Order

12372'' (50 FR 47034) exempts RUS and Rural Telephone Bank loans and

loan guarantees from coverage under this Order.

Executive Order 12988

This rule has been reviewed under Executive Order 12988, Civil

Justice Reform. RUS has determined that this rule meets the applicable

standards provided in section 3 of the Executive Order. In addition,

all State and local laws and regulations that are in conflict with this

rule will be preempted, no retroactive effort will be given to this

rule, and, in accordance with Sec. 212(e) of the Department of

Agriculture Reorganization Act of 1994 (7 U.S.C. Sec. 6912(e)),

administrative appeal procedures, if any, must be exhausted before an

action against the Department or its agencies may be initiated.

Regulatory Flexibility Act Certification

RUS has determined that this proposed rule will not have a

significant economic impact on a substantial number of small entities,

as defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

The RUS telecommunications program provides loans to borrowers at

interest rates and on terms that are more favorable than those

generally available from the private sector. RUS borrowers, as a result

of obtaining federal financing, receive economic benefits that exceed

any direct economic costs associated with complying with RUS

regulations and requirements.

Information Collection and Recordkeeping Requirements

This rule contains no new reporting or recordkeeping burdens under

OMB control number 0572-0079 that would require approval under the

Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).

National Environmental Policy Act Certification

The Administrator of RUS has determined that this proposed 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 proposed rule is listed in the

Catalog of Federal Domestic Assistance Programs under number 10.851,

Rural Telephone Loans and Loan Guarantees; and number 10.852, Rural

Telephone Bank Loans. This catalog is available on a subscription basis

from the Superintendent of Documents, the United States Government

Printing Office, Washington, DC 20402-9325.

Unfunded Mandates

This rule contains no Federal mandates (under the regulatory

provisions of Title II of the Unfunded Mandates Reform Act of 1995) for

State, local, and tribal governments or the private sector. Thus, this

rule is not subject to the requirements of section 202 and 205 of the

Unfunded Mandates Reform Act of 1995.

Background

RUS is proposing to amend its regulations covering lien

accommodations under certain circumstances where the borrower's

financial strength is sufficient to protect security for the

Government's loans and the lender seeking a lien accommodation.

Since the passage of the Telecommunications Act of 1996, which

provides for a competitive, deregulated national telecommunications

policy framework, the Federal Communications Commission (FCC) has been

working to implement the provisions of the new law. As those provisions

begin to be integrated through the FCC's rulemaking process, the FCC is

focusing on the types of telecommunications service that must be made

available to all Americans; i.e. part of universal service, and the

benefits to all Americans from advanced services for schools,

libraries, and rural health care providers. The newly competitive

environment will undoubtedly affect the rural telecommunications

marketplace. For the industry as a whole--urban and rural--competition

will offer the means for delivering the universal service concept

envisioned by the Telecommunications Act of 1996. In the competitive

marketplace of the future, investment in infrastructure will be

lucrative in markets where local exchange carriers seek to attract

high-usage, low-cost subscribers. Competition will be fierce and

customers will be the winners as their demands for new and improved

service at affordable rates will be met. Yet in rural and high-cost

areas, where quality of service and advanced service offerings are just

as important, there is less potential for investment based on

competition. Investment will need to be encouraged in the form of

incentives through the universal support mechanisms and the lending

programs of RUS, as well as private sources of financing. RUS will

continue its partnership with rural America to ensure that

telecommunications providers will have the means to modernize their

networks; however, industry deregulation and new technological

developments have caused RUS borrowers and other organizations

providing telecommunications services to consider undertaking projects

that provide new telecommunications services and other

telecommunications services not ordinarily financed by RUS. Although

some of these services may not be eligible for financing under the

Rural Electrification Act of 1936 (RE Act), these services may

nevertheless advance RE Act objectives where the borrower obtains

financing from private lenders.

Due to the changing environment of the telecommunications industry,

large or predominately non-rural local exchange carriers (LECs) are

selling their more rural exchanges in order to concentrate on their

more lucrative service areas. This ``sell-off'' provides an opportunity

for rural LECs to expand their service territories. Typically, these

acquired exchanges will need

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infrastructure improvements and the rural LECs will work hard to

provide state-of-the-art service. This will require increased

investment. RUS loans for infrastructure building can enable rural LECs

to upgrade plant and service territories that may have been neglected

for years. All subscribers, urban and rural, benefit from improvements

to the national network. While opportunities exist for rural LECs to

expand their markets and continue the tradition of providing the best

possible service available to rural residents, uncertainties regarding

future revenue streams and the availability of funds from universal

service support may hamper some small LECs' investment decisions. The

proposed amendments to this regulation will help to facilitate funding

from non-RUS sources in order to meet the growing capital needs of

rural LECs. Depending on the purposes for which a lien accommodation is

being sought, RUS will provide ``automatic'' approval for borrowers

that meet the financial tests described in this rule. RUS believes that

borrowers that are financially sound should be afforded more

flexibility with regard to financial arrangements with outside lenders

for the purpose of promoting rural telecommunications. The tests are

designed to ensure that the financial strength of the borrower is more

than sufficient to protect the government's loan security interests;

hence, the lien accommodations will not adversely affect the

government's financial interests.

In addition to providing for automatic lien accommodations, this

amendment will remove the requirement for borrowers seeking lien

accommodations to comply with competitive bid procedures under 7 CFR

part 1753. Further, RUS proposes to address other concerns involved in

the accommodation of the Government's lien for those borrowers that do

not qualify for an automatic lien accommodation in a subsequent

revision to this subpart.

List of Subjects in 7 CFR Part 1744

Accounting, Loan programs--communications, Reporting and

recordkeeping requirements, Rural areas, Telephone.

For reasons set out in the preamble, RUS proposes to amend 7 CFR

chapter XVII as follows:

PART 1744--POST-LOAN POLICIES AND PROCEDURES COMMON TO GUARANTEED

AND INSURED TELEPHONE LOANS

1. The authority citation for part 1744 is revised to read as

follows:

Authority: 7 U.S.C. 901 et seq., 1921 et. seq., and 6941 et seq.

2. Sections 1744.20 and 1744.21 are revised to read as follows:

Subpart B--Lien Accommodations and Subordination Policy

Sec. 1744.20 General.

(a) Recent changes in the telecommunications industry, including

deregulation and technological developments, have caused Rural

Utilities Service (RUS) borrowers and other organizations providing

telecommunications services to consider undertaking projects that

provide new telecommunications services and other telecommunications

services not ordinarily financed by RUS. Although some of these

services may not be eligible for financing under the Rural

Electrification Act of 1936 (RE Act), these services may nevertheless

advance RE Act objectives where the borrower obtains financing from

private lenders. The borrower's financial strength and the assurance of

repayment of outstanding Government debt may be improved as a result of

providing such telecommunications services.

(b) To facilitate the financing of new services and other services

not ordinarily financed by RUS, RUS is willing to consider

accommodating the Government's lien on telecommunications borrowers'

systems or accommodating or subordinating the Government's lien on

after-acquired property of telecommunications borrowers. To expedite

this process, requests for lien accommodations meeting the requirements

of Sec. 1744.30 will receive automatic approval from RUS.

(c) This subpart sets forth RUS policy with respect to all requests

for lien accommodations and subordinations for loans from private

lenders. For borrowers that do not qualify for automatic lien

accommodations in accordance with Sec. 1744.30, RUS will consider lien

accommodations for RE Act purposes under Sec. 1744.40 and non-Act

purposes under Sec. 1744.50.

Sec. 1744.21 Definitions.

The following definitions apply to this subpart:

Administrator means the Administrator of RUS and includes the

Governor of the RTB.

Advance means transferring funds from RUS, RTB, or a lender

guaranteed by RUS to the borrower's construction fund.

After-acquired property means property which is to be acquired by

the borrower and which would be subject to the lien of the Government

mortgage when acquired.

Amortization expense means the sum of the balances of the following

accounts of the borrower:

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Account names No.

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(1) Amortization expense..................................... 6560.2

(2) Amortization expense--tangible........................... 6563

(3) Amortization expense--intangible......................... 6564

(4) Amortization expense--other.............................. 6565

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Asset means a future economic benefit obtained or controlled by the

borrower as a result of past transactions or events.

Automatic lien accommodation means the approval, by RUS, of a

request to share the Government's lien on a pari passu or pro-rata

basis with a private lender in accordance with the provisions of

Sec. 1744.30.

Borrower means any organization that has an outstanding

telecommunications loan made or guaranteed by RUS, or that is seeking

such financing. See 7 CFR part 1735.

Construction Fund means the RUS Construction Fund Account into

which all advances of loan funds are deposited pursuant to the

provisions of the loan documents.

Debt Service Coverage (DSC) ratio means the ratio of the sum of the

borrower's net income, depreciation and amortization expense, and

interest expense, all divided by the sum of all payments of principal

and interest required to be paid by the borrower during the year on all

its debt from any source with a maturity greater than 1 year and

capital lease obligations.

Default means any event or occurrence which, unless corrected, will

with the passage of time and the giving of proper notices give rise to

remedies under one or more of the loan documents.

Depreciation expense means the sum of the balances of the following

accounts of the borrower:

[[Page 69949]]

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Account names No.

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(1) Depreciation expense..................................... 6560.1

(2) Depreciation expense--telecommunications plant in service 6561

(3) Depreciation expense--property held for future 6562

telecommunications use......................................

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Disbursement means a transfer of money by the borrower out of the

construction fund in accordance with the provisions of the fund.

Equity percentage means the total equity or net worth of the

borrower expressed as a percentage of the borrower's total assets.

FFB means the Federal Financing Bank.

Financial Requirement Statement (FRS) means RUS Form 481 (OMB--No.

0572-0023). (This RUS Form is available from RUS, Program Development

and Regulatory Analysis, Washington, DC 20250-1522.)

Government mortgage means any instrument to which the Government,

acting through the Administrator, is a party and which creates a lien

or security interest in the borrower's property in connection with a

loan made or guaranteed by RUS whether the Government is the sole

mortgagee or is a co-mortgagee with a private lender.

Hardship loan means a loan made by RUS under section 305(d)(1) of

the RE Act.

Interim construction means the purchase of equipment or the conduct

of construction under an RUS-approved plan of interim financing. See 7

CFR part 1737.

Interest expense means the sum of the balances of the following

accounts of the borrower:

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Account names No.

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(1) Interest and related items......................... 7500

(2) Interest on funded debt............................ 7510

(3) Interest expense--capital leases................... 7520

(4) Amortization of debt issuance expense.............. 7530

(5) Less Allowance for funds used during construction.. 7340/7300.4

(6) Other interest deductions.......................... 7540

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Interim financing means funding for a project which RUS has

acknowledged may be included in a loan, should said loan be approved,

but for which RUS loan funds have not yet been made available.

Lien accommodation means sharing the Government's lien on a pari

passu or pro-rata basis with a private lender.

Loan means any loan made or guaranteed by RUS.

Loan documents means the loan contract, note and mortgage between

the borrower and RUS and any associated document pertinent to a loan.

Loan funds means the proceeds of a loan made or guaranteed by RUS.

Material and supplies means any of the items properly recordable in

the following account of the borrower:

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Account names No.

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(1) Material and Supplies.................................... 1220.1

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Net income/Net margins means the sum of the balances of the

following accounts of the borrower:

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Account names No.

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(1) Local Network Services 5000 through 5069.

Revenues.

(2) Network Access Services 5080 through 5084.

Revenues.

(3) Long Distance Network 5100 through 5169.

Services Revenues.

(4) Miscellaneous Revenues...... 5200 through 5270.

(5) Nonregulated Revenues....... 5280.

(6) Less Uncollectible Revenues. 5200 through 5302.

(7) Less Plant Specific 6110 through 6441.

Operations Expense.

(8) Less Plant Nonspecific 6510 through 6565.

Operations Expense.

(9) Less Customer Operations 6610 through 6623.

Expense.

(10) Less Corporate Operations 6710 through 6790.

Expense.

(11) Other Operating Income and 7100 through 7160.

Expense.

(12) Less Operating Taxes....... 7200 through 7250/7200.5.

(13) Nonoperating Income and 7300 through 7370.

Expense.

(14) Less Nonoperating Taxes.... 7400 through 7450/7400.5.

(15) Less Interest and Related 7500 through 7540.

Items.

(16) Extraordinary Items........ 7600 through 7640/7600.4.

(17) Jurisdictional Differences 7910 through 7990.

and Nonregulated Income Items.

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Net plant means the sum of the balances of the following accounts

of the borrower:

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Account names No.

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(1) Property, Plant and 2001 through 2007.

Equipment.

(2) Less Depreciation and 3100 through 3600.

Amortization

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Notes means evidence of indebtedness secured by or to be secured by

the Government mortgage.

Pari Passu means equably; ratably; without preference or

precedence.

Plant means any of the items properly recordable in the following

accounts of the borrower:

[[Page 69950]]

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Account names No.

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(1) Property, Plant and 2001 through 2007.

Equipment.

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Private lender means any lender other than the RUS or the lender of

a loan guaranteed by RUS.

Private lender notes means the notes evidencing a private loan.

Private loan means any loan made by a private lender.

RE Act (Act) means the Rural Electrification Act of 1936 (7 U.S.C.

901 et seq.)

RTB means the Rural Telephone Bank.

RUS means the Rural Utilities Service, and includes its

predecessor, the Rural Electrification Administration. The term also

includes the RTB, unless otherwise indicated.

RUS cost-of-money loan means a loan made under section 305(d)(2) of

the RE Act.

Subordination means allowing a private lender to have a lien on

specific property which will have priority over the Government's lien

on such property.

Tangible plant means any of the items properly recordable in the

following accounts of the borrower:

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Account names No.

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(1) Telecommunications Plant in 2110 through 2124.

Service--General Support Assets.

(2) Telecommunications Plant in 2210 through 2232.

Service--Central Office Assets.

(3) Telecommunications Plant in 2310 through 2362.

Service--Information

Origination/Termination Assets.

(4) Telecommunications Plant in 2410 through 2441.

Service--Cable and Wire

Facilities Assets.

(5) Amortizable Tangible Assets 2680 through 2682.

(6) Nonoperating Plant.......... 2006.

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Telecommunication services means any service for the transmission,

emission, or reception of signals, sounds, information, images, or

intelligence of any nature by optical waveguide, wire, radio, or other

electromagnetic systems and shall include all facilities used in

providing such service as well as the development, manufacture, sale,

and distribution of such facilities.

Times interest earned ratio (TIER) means the ratio of the

borrower's net income or net margins plus interest expense, divided by

said interest expense.

Total assets means the sum of the balances of the following

accounts of the borrower:

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Account names No.

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(1) Current Assets.............. 1100s through 1300s.

(2) Noncurrent Assets........... 1400s through 1500s.

(3) Total telecommunications 2001 through 2007.

plant.

(4) Less accumulated 3100 through 3300s.

depreciation.

(5) Less accumulated 3400 through 3600s.

amortization.

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Total equity or net worth means the excess of a borrower's total

assets over its total liabilities.

Total liabilities means the sum of the balances of the following

accounts of the borrower:

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Account names No.

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(1) Current Liabilities......... 4010 through 4130.2.

(2) Long-Term Debt.............. 4210 through 4270.3.

(3) Other Liabilities and 4310 through 4370.

Deferred Credits.

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Total long-term debt means the sum of the balances of the following

accounts of the borrower:

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Account names No.

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(1) Long-Term Debt.............. 4210 through 4270.3

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Note: All references to account numbers are to the Uniform System of

Accounts (7 CFR part 1770, subpart B).

Weighted-average life of the loans or notes means the average life

of the loans or notes based on the proportion of original loan

principal paid during each year of the loans or notes. It shall be

determined by calculating the sum of all loan or note principal

payments expressed as a fraction of the original loan or note principal

amount, times the number of years and fractions of years elapsed at the

time of each payment since issuance of the loan or note. For example,

given a $5 million loan, with a maturity of 5 years and equal principal

payments of $1 million due on the

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anniversary date of the loan, the weighted-average life would be:

(.2)(1 year) + (.2)(2 years) + (.2)(3 years) + (.2)(4 years) + (.2)(5

years) = .2 years + .4 years + .6 years + .8 years + 1.0 years = 3.0

years. If instead the loan had a balloon payment of $5 million at the

end of 5 years, the weighted-average life would be: ($5 million/$5

million)(5 years) = 5 years.

Weighted-average remaining life of the loans or notes means the

remaining average life of the loans or notes based on the proportion of

remaining loan or note principal expressed in years remaining to

maturity of the loans or notes. It shall be determined by calculating

the sum of the remaining principal payments of each loan or note

expressed as a fraction of the total remaining loan or note amounts

times the number of years and fraction of years remaining until

maturity of the loan or note.

Weighted-average remaining useful life of the assets means the

estimated original average life of the assets to be acquired with the

proceeds of the private lender notes expressed in years based on

depreciation rates less the number of years those assets have been in

service (or have been depreciated). It shall be determined by

calculating the sum of each asset's remaining value expressed as a

fraction of the total remaining value of the assets, times the

estimated number of years and fraction of years remaining until the

assets are fully depreciated.

Wholly-owned subsidiary means a corporation owned 100 percent by

the borrower.

3. Sections 1744.30, 1744.40, and 1744.50 are redesignated as

Secs. 1744.40, 1744.50, and 1744.55, respectively.

4. New section 1744.30 is added to read as follows:

Sec. 1744.30 Automatic lien accommodations.

(a) Purposes and requirements for approval. Automatic lien

accommodations are available only for refinancing and refunding of

notes secured by the borrower's existing Government mortgage; financing

assets, to be owned by the borrower, to provide telecommunications

services; or financing assets, to be owned by a wholly-owned subsidiary

of the borrower, to provide telecommunications services in accordance

with the procedures set forth below.

(b) Private lender responsibility. The private lender is

responsible for ensuring that its notes, for which an automatic lien

accommodation has been approved as set forth in this section are

secured under the mortgage. The private lender is responsible for

ensuring that the supplemental mortgage is a valid and binding

instrument enforceable in accordance with its terms, and recorded and

filed in accordance with applicable law. If the private lender

determines that additional documents are required or that RUS must take

additional actions to secure the notes under the mortgage, the private

lender shall follow the procedures set forth in Sec. 1744.40 or

Sec. 1744.50, as appropriate.

(c) Refinancing and refunding. The Administrator will automatically

approve a borrower's execution of private lender notes and the securing

of such notes on a pari passu or pro-rata basis with all other notes

secured under the Government mortgage, when such private lender notes

are issued for the purpose of refinancing or refunding any notes

secured under the Government mortgage, provided that all of the

following conditions are met:

(1) No default has occurred and is continuing under the Government

mortgage;

(2) The borrower has delivered to the Administrator, at least 10

business days before the private lender notes are to be executed, a

certification and agreement executed by the President of the borrower's

Board of Directors, such certification and agreement to be

substantially in the form set forth in Appendix A of this subpart,

providing that:

(i) No default has occurred and is continuing under the Government

mortgage;

(ii) The principal amount of such refinancing or refunding notes

will not be greater than 105 percent of the then outstanding principal

balance of the notes being refinanced or refunded;

(iii) The weighted-average life of the private loan evidenced by

the private lender notes will not exceed the weighted-average remaining

life of the notes being refinanced or refunded;

(iv) The private lender notes will provide for substantially level

debt service or level principal amortization over a period not less

than 5 years;

(v) Except as provided in the Government mortgage, the borrower has

not agreed to any restrictions or limitations on future loans from RUS;

and

(vi) If the private lender determines that a supplemental mortgage

is necessary, the borrower will comply with those procedures set forth

in paragraph (h) of this section for the preparation, execution, and

delivery of a supplemental mortgage and take such additional action as

may be required to secure the notes under the Government mortgage.

(d) Financing assets to be owned directly by a borrower. The

Administrator will automatically approve a borrower's execution of

private lender notes and the securing of such notes on a pari passu or

pro-rata basis with all other notes secured under the Government

mortgage, when such private lender notes are issued for the purpose of

financing the purchase or construction of plant and material and

supplies to provide telecommunication services and when such assets are

to be owned and the telecommunications services are to be offered by

the borrower, provided that all of the following conditions are met:

(1) The borrower has achieved a TIER of not less than 1.5 and a DSC

of not less than 1.25 for each of the borrower's two fiscal years

immediately preceding the issuance of the private lender notes;

(2) The ratio of the borrower's net plant to its total long-term

debt at the end of any calendar month ending not more than 90 days

prior to execution of the private lender notes is not less than 1.2, on

a pro-forma basis, after taking into account the effect of the private

lender notes on the total long-term debt of the borrower;

(3) The borrower's equity percentage, as of the most recent fiscal

year-end, was not less than 25 percent;

(4) No default has occurred and is continuing under the Government

mortgage;

(5) The borrower has delivered to the Administrator, at least 10

business days before the private lender notes are to be executed, a

certification by an independent certified public accountant that the

borrower has met each of the requirements in paragraphs (d)(1) and

(d)(3) of this section, such certification to be substantially in the

form in Appendix B of this subpart; and

(6) The borrower has delivered to the Administrator, at least 10

business days before the private lender notes are to be executed, a

certification and agreement executed by the President of the borrower's

Board of Directors, such certification and agreement to be

substantially in the form in Appendix C of this subpart: provided,

that:

(i) The borrower has met each of the requirements in paragraphs

(d)(2) and (d)(4) of this section;

(ii) The proceeds of the private lender notes are to be used for

the construction or purchase of the plant and materials and supplies to

provide telecommunications services in accordance with this section and

such construction or purchase is expected to be completed not later

than 4 years after execution of such notes;

[[Page 69952]]

(iii) The weighted-average life of the private loan evidenced by

the private lender notes does not exceed the weighted-average remaining

useful life of the assets being financed;

(iv) The private lender notes will provide for substantially level

debt service or level principal amortization over a period not less

than 5 years;

(v) All of the assets financed by the private loans will be

purchased or otherwise procured in bona fide arm's length transactions;

(vi) The financing agreement with the private lender will provide

that the private lender shall cease the advance of funds upon receipt

of written notification from RUS that the borrower is in default under

the RUS loan documents;

(vii) Except as provided in the Government mortgage, the borrower

has not agreed to any restrictions or limitations on future loans from

RUS; and

(viii) If the private lender determines that a supplemental

mortgage is necessary, the borrower will comply with those procedures

set forth in paragraph (h) of this section for the preparation,

execution, and delivery of a supplemental mortgage and take such

additional action as may be required to secure the notes under the

Government mortgage.

(e) Financing assets to be owned by a wholly-owned subsidiary of

the borrower. The Administrator will automatically approve a borrower's

execution of private lender notes and the securing of such notes on a

pari passu or pro-rata basis with all other notes secured under the

Government mortgage, when such private lender notes are issued for the

purpose of financing the purchase or construction of tangible plant and

material and supplies to provide telecommunication services and when

such services are to be offered and the associated tangible assets are

to be owned by a wholly-owned subsidiary of the borrower, provided that

all of the following conditions are met:

(1) The borrower has achieved a TIER of not less than 2.5 and a DSC

of not less than 1.5 for each of the borrower's two fiscal years

immediately preceding the issuance of the private lender notes;

(2) The ratio of the borrower's net plant to its total long-term

debt at the end of any calendar month ending not more than 90 days

prior to execution of the private lender notes is not less than 1.6, on

a pro-forma basis, after taking into account the effect of the private

lender notes on the total long-term debt of the borrower;

(3) The borrower's equity percentage, as of the most recent fiscal

year-end, was not less than 45 percent;

(4) No default has occurred and is continuing under the Government

mortgage;

(5) The borrower has delivered to the Administrator, at least 10

business days before the private lender notes are to be executed, a

certification by an independent certified public accountant that the

borrower has met each of the requirements in paragraphs (e)(1) and

(e)(3) of this section, such certification to be substantially in the

form in Appendix D of this subpart; and

(6) The borrower has delivered to the Administrator, at least 10

business days before the private lender notes are to be executed, a

certification and agreement executed by the President of the borrower's

Board of Directors, such certification and agreement to be

substantially in the form in Appendix E of this subpart; providing

that:

(i) The borrower has met each of the requirements in paragraphs

(e)(2) and (e)(4) of this section;

(ii) The proceeds of the private lender notes are to be used for

the construction or purchase of the tangible plant and materials and

supplies to provide telecommunications services in accordance with this

section and such construction or purchase is expected to be completed

not later than 4 years after execution of such notes;

(iii) The weighted-average life of the private loan evidenced by

the private lender notes does not exceed the weighted-average remaining

useful life of the assets being financed;

(iv) The private lender notes will provide for substantially level

debt service or level principal amortization over a period of time not

less than 5 years;

(v) All of the assets financed by the private loans will be

purchased or otherwise procured in bona fide arm's length transactions;

(vi) The proceeds of the private lender notes will be lent to a

wholly-owned subsidiary of the borrower pursuant to terms and

conditions agreed upon by the borrower and subsidiary;

(vii) The borrower will, whenever requested by RUS, provide RUS

with a copy of the financing or guarantee agreement between the

borrower and the subsidiary or any similar or related material

including security instruments, loan contracts, or notes issued by the

subsidiary to the borrower;

(viii) The borrower will promptly report to the Administrator any

default by the subsidiary or other actions that impair or may impair

the subsidiary's ability to repay its loans;

(ix) The financing agreement with the private lender will provide

that the private lender shall cease the advance of funds upon receipt

of written notification from RUS that the borrower is in default under

the RUS loan documents;

(x) Except as provided in the Government mortgage, the borrower has

not agreed to any restrictions or limitations on future loans from RUS;

and

(xi) If the private lender determines that a supplemental mortgage

is necessary, the borrower will comply with those procedures set forth

in paragraph (h) of this section for the preparation, execution, and

delivery of a supplemental mortgage and take such additional action as

may be required to secure the notes under the Government mortgage.

(f) Borrower notification. The borrower shall notify RUS of its

intention to obtain an automatic lien accommodation under this section

by providing the following:

(1) The board resolution cited in Sec. 1744.55(b)(1) and the

opinion of counsel cited in Sec. 1744.55(b)(2);

(2) The applicable certification or certifications required by

paragraph (c)(2); paragraphs (d)(5) and (d)(6); or paragraphs (e)(5)

and (e)(6), respectively, of this section, in substantially the form

set forth in the applicable appendices to this subpart.

(g) RUS acknowledgment. Within 5 business days of receipt of the

completed certifications and any other information required under this

section, RUS will review the information and provide written

acknowledgment to the borrower of its qualification for an automatic

lien accommodation. Upon receipt of the acknowledgment, the borrower

may execute the private lender notes.

(h) Supplemental mortgage. If the private lender determines that a

supplemental mortgage is required to secure the private lender notes on

a pari passu or pro-rata basis with all other notes secured under the

Government mortgage, the private lender may prepare the supplemental

mortgage using the form attached as Appendix F to this subpart or the

borrower may request RUS to prepare such supplemental mortgage in

accordance with the following procedures:

(1) The private lender preparing the supplemental mortgage shall

execute and forward the completed document to RUS. Upon ascertaining

the correctness of the form and the information concerning RUS, RUS

will execute and forward the supplemental mortgage to the borrower.

[[Page 69953]]

(2) When requested by the borrower, RUS will expeditiously prepare

the supplemental mortgage, using the form in Appendix F to this

subpart, upon submission by the private lender of:

(i) The name of the private lender;

(ii) The Property Schedule for inclusion as supplemental mortgage

Schedule B, containing legally sufficient description of all real

property owned by the borrower; and

(iii) The amount of the private lender note.

(3) The private lender is responsible for ensuring that the

supplemental mortgage has been executed by all parties and is a valid

and binding instrument enforceable in accordance with its terms, and

recorded and filed in accordance with applicable law. If the private

lender determines that additional security instruments or other

documents are required or that RUS must take additional actions to

secure the private lender notes under the mortgage, the private lender

shall follow the procedures set forth in Secs. 1744.40 or 1744.50, as

appropriate. When processing of the supplemental mortgage has been

completed to the satisfaction of the private lender, the borrower shall

provide RUS with the following:

(i) A fully executed counterpart of the supplemental mortgage,

including all signatures, seals, and acknowledgements; and

(ii) Copies of all opinions rendered by borrower's counsel to the

private lender.

(i) Other approvals. (1) The borrower is responsible for meeting

all requirements necessary to issue private lender notes and to

accommodate the lien of the Government mortgage to secure the private

lender notes including, but not limited to, those of the private

lender, of any other mortgagees secured under the existing RUS

mortgage, and of any governmental entities with jurisdiction over the

issuance of notes or the execution and delivery of the supplemental

mortgage.

(2) To the extent that the borrower's existing mortgage requires

RUS approval before the borrower can make an investment in an

affiliated company, approval is hereby given for all investments made

in affiliated companies with the proceeds of private lender notes

qualifying for an automatic lien accommodation under paragraph (e) of

this section. Any reference to an approval by RUS under the mortgage

shall apply only to the rights of RUS and not to any other party.

5. Revise newly redesignated Sec. 1744.50(a)(3), to read as

follows:

Sec. 1744.50 Non-Act purposes.

(a) * * *

(3) Approval of the request is in the interests of the Government

with respect to the financial soundness of the borrower and other

matters, such as assuring that the borrower's system is constructed

cost-effectively using sound engineering practices.

* * * * *

6. In newly redesignated Sec. 1744.55, revise paragraph (a), remove

paragraph (b)(5), and redesignate paragraph (b)(6) as paragraph (b)(5),

to read as follows:

Sec. 1744.55 Application procedures.

(a) Requests for information regarding applications for lien

accommodations or subordination under this part should be addressed to

the Assistant Administrator, Telecommunications Program, Rural

Utilities Service, Washington, DC 20250-1590.

* * * * *

7. Appendices A, B, C, D, E, and F are added to subpart B to read

as follows:

BILLING CODE 3410-15-P

[[Page 69954]]

Appendix A to Subpart B of Part 1744--Statement, Certification, and

Agreement of President of Board of Directors Regarding Refinancing

and Refunding Notes Pursuant to 7 CFR 1744.30(c)

[GRAPHIC] [TIFF OMITTED] TP15DE99.001

[[Page 69955]]

Appendix B to Subpart B of Part 1744--Certification of Independent

Certified Public Accountant Regarding Notes To Be Issued Pursuant

to 7 CFR 1744.30(c)

[GRAPHIC] [TIFF OMITTED] TP15DE99.002

[[Page 69956]]

Appendix C to Subpart B of Part 1744--Statement, Certification, and

Agreement of President of Board of Directors Regarding Notes to be

Issued Pursuant to 7 CFR 1744.30(d)

[GRAPHIC] [TIFF OMITTED] TP15DE99.003

[[Page 69957]]

Appendix D to Subpart B of Part 1744--Certification of Independent

Certified Public Accountant Regarding Notes To Be Issued Pursuant

to 7 CFR 1744.30

[GRAPHIC] [TIFF OMITTED] TP15DE99.004

[[Page 69958]]

Appendix E to Subpart B of Part 1744--Statement, Certification, and

Agreement of President of Board of Directors Regarding Notes To Be

Issued Pursuant to 7 CFR 1744.30(e)

[GRAPHIC] [TIFF OMITTED] TP15DE99.005

[[Page 69959]]

[GRAPHIC] [TIFF OMITTED] TP15DE99.006

[[Page 69960]]

Appendix F to Subpart B of Part 1744--Form of Supplemental Mortgage

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[[Page 69961]]

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[[Page 69962]]

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Dated: November 22, 1999.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 99-31367 Filed 12-14-99; 8:45 am]

BILLING CODE 3410-15-C