Aug. 28, 2002 – Jeffrey Prosser's Innovative Telephone has continued its winning ways in Washington, adding more than $27 million to its borrowings from an obscure not-for-profit bank in the nation's capital in that institution's fiscal year which ended May 31.
The total amount of Innovative's loans from the National Rural Utilities Cooperative Finance Corp. grew from $587,819,000 as of May 31, 2001, to $615,599,000 on May 31, 2002. This is documented in the fine print of the CFC’s annual 10-K report filed earlier this month with the federal Securities and Exchange Commission.
The CFC plays the role of wholesale banker for the rural electric power and telecommunications industries. It borrows large sums of money on Wall Street at relatively favorable rates and then lends out smaller (but considerable) sums to telephone and power companies at slightly higher rates, supporting itself on the difference. Because of a decision made many years ago, the Virgin Islands and the other U.S. island territories are regarded as "rural" in this context.
This flow of more than $27 million from the CFC to Innovative – a loan that is meant to be repaid — should not be confused with the $25 million annual subsidy that Innovative gets from another obscure Washington-area financial institution, the Universal Service Administrative Company (USAC). (See "Despite high subsidies, phone users pay more".)
And both the CFC loan and the USAC subsidy are separate from the $1-a-month increase as of July in Innovative Telephone's subscriber line charge, which is worth nearly $1 million a year to the phone company. (See "Local phone bills differ from mainland".) Innovative Telephone's increase in the subscriber line or "end user access" charge was the result of a nationwide decision by the Federal Communications Commission and is unrelated to the other two financial decisions — although all have come out of Washington and all have meant more funds for Innovative.
Innovative Telephone is not named in the report to the SEC by the CFC, an institution that tends to be secretive. But since the CFC does publish the distribution of its loans on a state and territorial basis, and since Innovative is the only CFC member in the Virgin Islands, the annual CFC table on the geographic distribution of its loans indicates how much it has lent to Innovative.
To access the report (a pdf document requiring Acrobat Reader software, which can be downloaded free) on the Internet, go to the Cooperative Finance Corp.10-K 2002 Web site. The listing of loans outstanding by state and territory is on the document page numbered 78.
According to another geography-based table in the report, Innovative has 3.1 percent of the CFC’s giant $20 billion or so loan portfolio. This makes Innovative one of the CFC’s 10 largest borrowers of all kinds, and one of its five largest in the telecommunications field (the other five are in the electric power business).
A careful reading of the latest 10-K report from the CFC suggests a desire on the part of that institution to reduce the extent to which its loans are concentrated among the Big 10 borrowers, which together have 26 percent of the portfolio. The CFC also seems to be concerned about the concentration of its loan portfolio in the telecommunications industry, presumably in light of the recent collapse of stock prices in that sector of the economy. Innovative is both one of the Big 10 borrowers and one of the five largest telecommunication borrowers.
CFC loans to Innovative Telephone, which exceed its loans to all utilities in the states of Virginia and Wisconsin combined, may be destined to stop growing. The most recent CFC report (page 50) states: "No new loans are anticipated to the five largest telecommunications borrowers, which should result in a reduction in the balance of telecommunications loans in the ten largest borrowers at May 31, 2003."
However, somewhat similar muted language about loan concentrations in previous CFC annual reports did not lead to a decline in Innovative's loan balance in the years that followed.
How much annual interest Innovative is paying for its borrowing of more than half a billion dollars cannot be gleaned from the report to the SEC. But one can put upper and lower limits on that expense.
The CFC’s average rate for fixed-interest loans is shown in the report as 7.9 percent, and its average variable rate is reported at 5.71 percent. Assuming that Innovative is paying average rates and that some parts of its loan portfolio are in each of the two categories, one can calculate that the annual interest charges on $615,599,000 would be somewhere between $35.1 million and $48.6 million.
That would be somewhere between about $3 million and $4 million in interest alone every month, without repayment on the principal. The USAC subsidy of $2 million-plus a month should help but would fall far short of paying the full bill.
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