Debt Capital Markets in a Debt Challenged World

1. Debt Capital Markets in a Debt Challenged World National Society of Accountants for Cooperatives Far West Chapter Annual Meeting May 27, 2010

2. National Society of Accountants for Cooperatives Far West Chapter • Leo Harris • Roman Weil • Undergraduate business schools/CoBank Credit Associates • Keith Hesterberg

3. Welcome “May you live in interesting times” – not attributable (Western origin-likely credited by an investment banker as an ancient Chinese proverb to make it more credible.

4. Interesting times, indeed. 1,000 point intraday drop in DJIA on May 6, 2010

5. Unprecedented global central bank intervention

6. World’s scariest roller coaster and S&P/Case-Shiller Home Price Indices

7. Eurozone contagion

8. Interesting times, indeed. • 1,000 point drop in DJIA on May 6, 2010 • Unprecedented global central bank intervention • Roller coaster-like S&P/Case-Shiller Home Price Indices • Greece sovereign debt issues/Eurozone contagion • Regulation uncertainty – Congress is looking to fix what ails the financial system and markets • Screaming headlines – delivered thousands of times a day to your computer and BlackBerry

9. Introduction/Perspective • CoBank is the nation’s leading loan syndication bank for farmer-owned cooperatives. We have a noble purpose—to provide our client-owners access to the debt capital markets. • $33.5 billion of syndication loans under management at FYE2009 • 38 syndicated loan transactions in 2009 • $10 billion of loan sales in 2009 • $12 billion of loan sales in 2008 (record year)

10. Domestic Economy/Debt Market Overview Fed’s aggressive monetary stimulus continues (public debt) Unemployment expected to be high for next year Steep yield curve to rebuild bank balance sheets Is Fed policy underwriting the next asset bubble? Hope they don’t run out of bullets and band-aids Implied forward interest rates show short-term rates 90-100 basis points higher in one year (economists’ views are varied) February 5, 2010: Recovery (until yesterday-the worst day of the year; DJIA below 10,000 briefly) in equity markets, relatively strong quarterly earnings although sales/top lines are struggling. NOT MUCH HAS CHANGED IN LAST 75 DAYS.

11. Domestic Economy/Debt Market Overview IMF recently estimated that only 60% of bank losses have been recognized in U.S., only 40% in Europe Moody’s tracking approximately $10 trillion of bank debt maturities by end of 2015 Until this week, illiquidity/funding costs appeared to be a distant memory thanks to Mr. Bernanke. LIBOR rates beginning to move higher, flight to Treasuries, High Yield Bond Market has shut down over the past two weeks.

12. Debt Market Overview Loan market has found its legs in the first 4 months of 2010 despite credit quality issues Consumer lending portfolios tied to deteriorating unemployment fundamentals Commercial real estate portfolios are expected to have significant losses Corporate defaults (continue albeit at a slower rate)

13. What’s Driving the Recovery in the Loan Market? The Fed Supply of money > demand for money Low demand: M&A, capital expenditures and working capital. Institutional investors are on the hunt for assets and yield 2009 HY bond inflows highest since 2003 Bond market adding technical support to loan market through deal refinancing Banks are Recapitalizing Easy, cheap money New year, new budgets, new bonus potential “Banks never make a bad new loan” 13

14. Percent of Outstanding Leveraged Loans in Payment Default or BankruptcyComprises all loans, including those not tracked in the LSTA/LPC mark-to-market service.Vast majority are institutional tranchesSource: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index As of 14

15. Average Debt Multiples of Highly Leveraged Loans Note: For years 1987-1996 Sub Debt/EBITDA reflects all Non Bank Debt/EBITDA Criteria: Pre-1996: L+250 and Higher; 1996 to Date: L+225 and Higher; Media Loans Excluded; There were too few deals in 1991 to form a meaningful sample 15

16. Average New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of BB/BB- LoansAs 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 16

17. Average New-Issue Pro Rata & Weighted Average First-Lien Institutional Spread of B+/B LoansAs 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 17

18. Deal Structure Trends Lower leverage Tighter covenants and security packages More asset-based financing Borrowing bases Shorter maturity loans (shaved off almost 4 years of tenor from 2006) Higher up-front fees Libor floors of 1 to 2.5% (middle-market banks and institutional investors) 18

19. Credit Crisis Impact on Agribusiness Increased fees and spreads of financing liquidity and working capital (not necessarily increased costs given lower funding costs) Volatile grain, oil, protein and fertilizer prices require more financing 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 Fiscal and monetary stimulation vs. recession and deleveraging 19

20. Investor Segments • Commercial banks • Supportive of top tier relationships • Executing plans desired business lines, markets, industries, corporate relationships • Regaining focus after 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 implemented capital allocation committees in addition to credit committees as second level of relationship evaluation

21. Investor Segments Insurance companies Private placement market robust in late 2009 and early 2010 (following public bond market) Returning to the investment grade market and upper non-investment grade market Sub-investment grade market (NAIC 3 and below) effectively non-existent Fixed-rate market 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 high 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

22. Farm Credit System Generally FCS institutions have strong capitalization ratios Relatively clean loan portfolios with historically high credit statistics going into the credit crisis 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

23. Credit Market Outlook Continued Global Unwinding of Leverage Banks, hedge funds, private equity, and consumers, all in process of unwinding leverage Government sector taking on new debt, risk of crowding out the private sector Derivative exposure concentrations still unknown to investors Commercial/investment banks likely to be cautious but probably can’t help themselves in the short-term with “easy/cheap” money; regulation may be the only restraint Rethinking risk management models Substantial internal restructuring and deleveraging 23

24. Credit Market Outlook Fundamentals of real estate and consumer credit problems likely to have a long tail and tied to unemployment dynamics and deleveraging Expectation of continued credit losses in many segments Credit spreads likely to be stable (tightened from late 2009) as US economy continues to recover; refinancing calendar likely to put floor on spreads Multiple levels of uncertainty remain: 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. Interest/funding rates have only one way to go (up) 24

25. Agribusiness Finance Outlook Quality of management teams and ability to assess and mitigate risk will be paramount (#1 on bankers’ scorecard) Lenders will stay focused on risk management practices Agricultural commodities likely to be volatile (duh) Capital will be available for the smart, strong and value-adding cooperatives 25

26. The Plan for Access to the Debt Capital Markets Maintain sufficient, committed multi-year liquidity Maintain financial flexibility Preserve strong balance sheet - leverage and commodities don’t mix. Too much leverage and rising interest expense can help you make new friends… 26

27. Who’s is your friend? Keith or the Interest Monkey 27

28. The Plan for Access to the Debt Capital Markets Maintain sufficient, committed multi-year liquidity Maintain financial flexibility Preserve strong balance sheet - leverage and commodities don’t mix Continue solid operating performance Manage staggered debt maturities Broaden communication and develop relationship with bank group Stay current on financial markets: in times of increased volatility what works today may not work tomorrow 28

29. Closing 29 “Don’t outsmart your common sense” – lyric from Lee Brice’s “That’s Crazy”

30. Thank you and Questions 30