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Cost of Capital in Today’s Economic Environment

Cost of Capital in Today’s Economic Environment. Society of Utility and Regulatory Financial Analysts April 16, 2009 Washington DC. CoBank at a Glance. A leading financial services company serving agribusinesses and rural utilities throughout the United States

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Cost of Capital in Today’s Economic Environment

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  1. Cost of Capital in Today’s Economic Environment Society of Utility and Regulatory Financial Analysts April 16, 2009 Washington DC

  2. CoBank at a Glance • A leading financial services company serving agribusinesses and rural utilities throughout the United States • Member of the Farm Credit System, a Government Sponsored Enterprise with $214 billion of assets at December 31, 2008 • Over $61 billion in assets at December 31, 2008; AA- rated by both S&P and Fitch • Cooperatively owned, headquartered in Denver, CO; regional offices and banking centers throughout the country

  3. Financial Strength Total Loan & Lease Volume $ in billions Net Income $ in millions

  4. Loan & Lease Portfolio (1) Total $44.6 billion Global Financial Services $7.91 billion Agribusiness $10.59 billion Communications, Energy & Water $11.03 billion Strategic Relationships $15.03 billion (1) As of December 31, 2008

  5. Communications, Energy & Water • $11.0 billion loan portfolio • Customers include: generation & transmission cooperatives, distribution cooperatives, rural communications companiesand water companies Total $44.6 billion

  6. State of Financial Markets

  7. GDP 2008 Gross Domestic Product Facts • World = $62.25 Trillion • US = $14.3 Trillion (23%) • Japan = $4.8 Trillion (8%) • China = $4.3 Trillion (7%) • Germany = $3.8 Trillion (6%) • France = $3.0 Trillion (5%) • UK = $2.8 Trillion (5%) • European Union = $18.8 Trillion (30%) • Source: CIA World Fact Book 7

  8. US Economic Statistics 4th Qtr GDP Declines by 6.3% annualized basis (BEA) March Unemployment 8.5% - 13.4 million people out of work, 2 million jobs lost in 1st Qtr. (Dept of Labor) Consumer Confidence Rate = 26% (Conference BD) 1.5 million homes in foreclosure (RealtyTrac) Home values fall 17.6% off 06 peak (Zillow) 20% 08 Sales were “Foreclosure” Sales (Zillow) 1 out of 6 homes have negative equity (Zillow) 8

  9. What Went Wrong? • Subprime Meltdown • Shock in Housing Markets • Securitization Market Tanks • Liquidity Concerns in Market • Company Failures: Bear Sterns, Lehman Brothers, Washington Mutual 9

  10. Credit Market Trends Massive drop in bank debt issuance since mid-2007, intensified after September 2008 Impact on structure and pricing:Lower leverage, tighter covenants, shorter tenors, higher pricing Arrangers showing little to no appetite for taking underwriting risk - “Best Efforts” & “Market Flex” - “Club Deals” Increased reliance on existing relationships

  11. Syndicated Bank Loan Volume 8/9/2014 11

  12. Senior Loan Volume – Non Investment Grade 762.4 643.8 This chart reflects the estimated primary volume to the US and European loan markets. Exchange rates from non-USD currencies are based upon date of launch of the individual transactions.

  13. Credit Markets 13 13 Slowly thawing credit markets Bond market spreads wider compared to historical spreads but beginning to narrow Syndicated loan market almost completely shut-down, starting to slowly come back Market Based Pricing now being used for investment grade revolvers

  14. Recent 10-Year Treasury Rates

  15. Spreads for U.S. Gas and Electric, Rated A, BBB

  16. Average Spreads to Maturity by Corporate Credit RatingReflects 15 Largest Index Names in Each CategorySource: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index June 2007 – 3/12/09 Credit Market Trends-Increased Pricing B/B2 B+/B1 BB-/Ba3

  17. 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 Derivative exposure concentrations still unknown

  18. Credit Market Outlook Commercial/investment banks likely to remain under extreme pressure through 2009 and likely into 2010 Need to raise more capital, who will provide it? Rethinking risk management models Substantial internal restructuring and deleveraging How will the regulatory environment change?

  19. Credit Market Outlook Fed and other central banks appear to be focused on providing liquidity and seeking creative solutions Fundamentals of real estate and mortgage market problems likely to have a long tail Lender perspective that the economy is in a prolonged and deep recession. Persistent expectation of higher credit losses in corporate lending are to come 14

  20. Credit Market Outlook Virtually all investors are looking to decrease portfolio risk Multiple levels of uncertainty: global economy, commodity prices, credit availability, dollar value, financial strength of institutions/counterparties, derivative exposure concentrations, risk management (model) risks, regulatory changes, etc. 14

  21. Steve GustafsonSenior Managing DirectorWater & Environmental ServicesCoBank, ACB5500 South Quebec StreetGreenwood Village, CO 80111Phone: 303 740 4310sgustafson@cobank.com

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