Rural Development:

Investment Limitation by RTB Borrowers

AFMD-90-51FS: Published: Feb 5, 1990. Publicly Released: Feb 5, 1990.

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Pursuant to a congressional request, GAO provided financial information on Rural Electrification Administration (REA) and Rural Telephone Bank (RTB) telephone loan borrowers, focusing on the effects of proposed rural development legislation on REA and RTB telephone loan repayment.

GAO noted that: (1) the legislation could require that rural telephone borrowers have a net-worth-to-total-assets ratio of 20 percent or more to qualify for rural development investment; (2) 804 out of 964 borrowers were eligible to invest and had an average ratio of 40 percent; (3) a 20-percent investment limit would be more restrictive than the current limit but could produce investments totaling $1.968 billion, averaging $2.4 million per borrower; (4) borrowers' nonliquid, telephone plant assets were $11.535 billion, or 78 percent of total assets, thereby limiting funds available for investment; (5) other nonliquid investments amounted to $713 million, or 5 percent of total assets; (6) borrowers' investments from the remaining $2.585 billion in liquid funds would depend on their ability to balance their cash flows between investment funding and cash needed for current liabilities and operating expenses; (7) borrowers' net 1988 income after federal taxes was $1.105 billion, and their 1988 dividend payments were $558 million, or 50 percent of their net income; (8) if borrowers experienced cash flow problems, REA and RTB could suspend or reduce dividend payments to ensure prompt federal loan repayment; (9) financial examiners considered borrowers' 1988 $341-million interest expense adequate for investment; and (10) borrower financial auditing and reporting requirements would ensure proper monitoring by REA and RTB and provide early warning of loan repayment difficulties, enabling prompt correction through dividend reduction and debt rescheduling.

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