7 CFR 1774 - Subpart B

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

Rural Utilities Service, USDA

§1744.21

Subpart B—Lien Accommodations
and Subordination Policy
SOURCE: 51 FR 32430, Sept. 12, 1986, unless
otherwise noted. Redesignated at 55 FR 39396,
Sept. 27, 1990.
§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 §1744.30 will receive automatic approval from RUS.
(c) This subpart establishes 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 §1744.30, RUS will consider
lien accommodations for RE Act purposes under §1744.40 and non-Act purposes under §1744.50.
[66 FR 41758, Aug. 9, 2001]

§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:
Account names
(1) Amortization expense
(2) Amortization expense—tangible
(3) Amortization expense—intangible
(4) Amortization expense—other

Number
6560.2
6563
6564
6565

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 pani
passu or pro-rata basis with a private
lender in accordance with the provisions of §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.

383

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§1744.21
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:
Account names
(1) Depreciation expense
(2) Depreciation expense—telecommunications
plant in service
(3) Depreciation expense—property held for future telecommunications use

Number
6560.1
6561
6562

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. 05720023). (This RUS Form is available from
RUS, Program Development and Regulatory Analysis, Washington, DC 202501522).
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:
Account names
(1) Interest and related items
(2) Interest on funded debt

Number
7500
7510

Number

Account names
(3) Interest expense—capital leases
(4) Amortization of debt issuance expense
(5) Less Allowance for funds used during construction
(6) Other interest deductions

7520
7530
7340/
7300.4
7540

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 pani 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:
Account names
(1) Material and Supplies

Number
1220.1

NOTE: AU 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:
Account names

Number

(1) Local Network Services Revenues
(2) Network Access Services Revenues
(3) Long Distance Network Services
Revenues.
(4) Miscellaneous Revenues
(5) Nonregulated Revenues
(6) Less Uncollectible Revenues
(7) Less Plant Specific Operations Expense.
(8) Less Plant Nonspecific Operations
Expense.
(9) Less Customer Operations Expense
(10) Less Corporate Operations Expense.
(11) Other Operating Income and Expense.
(12) Less Operating Taxes

5000 through 5069
5080 through 5084
5100 through 5169
5200 through 5270
5280
5200 through 5302
6110 through 6441
6510 through 6565
6610 through 6623
6710 through 6790
7100 through 7160

7200 through 7250/
7200.5
(13) Nonoperating Income and Expense 7300 through 7370
7400 Through 7450/
(14) Less Nonoperating Taxes
7400.5

384

§1744.21

Rural Utilities Service, USDA
Account names

Number

(15) Less Interest and Related Items
(16) Extraordinary Items

7500 through 7540
7600 through 7640/
7600.4
(17) Jurisdictional Differences and Non- 7910 through 7990
regulated Income Items.

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:
Account names

Number

(1) Property, Plant and Equipment
(2) Less Depreciation and Amortization

2001 through 2007
3100 through 3600

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.
Pani Passu means equably; ratably;
without preference or precedence.
Plant means any of the items properly recordable in the following accounts of the borrower:
Account names
(1) Property, Plant and Equipment

Number
2001 through 2007

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:
Account names

Number

(1) Telecommunications Plant in Service—General Support Assets.
(2) Telecommunications Plant in Service—Central Office Assets.
(3) Telecommunications Plant In Service—Information
Origination/Termination Assets.
(4) Telecommunications Plant in Service—Cable and Wire Facilities Assets.
(5) Amortizable Tangible Assets
(6) Nonoperating Plant

2110 through 2124
2210 through 2232
2310 through 2362
2410 through 2441
2680 through 2682
2006

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:
Account names
(1) Current Assets
(2) Noncurrent Assets
(3) Total telecommunications plant
(4) Less accumulated depreciation
(5) Less accumulated amortization

Number
1100s through
1300s
1400s through
1500s
2001 through 2007
3100 through
33005
3400 through
3600s

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:
Account names
(1) Current Liabilities
(2) Long-Term Debt

385

Number
4010 through
4130.2
4210 through
4270.3

7 CFR Ch. )(VII (1-1-16 Edition)

§§1744.22-1744.29
Account names

Number

(3) Other Liabilities and Deterred Cred- 4310 through 4370
its.

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:
Account names
(1) Long-Term Debt

Number
4210 through
4270.3

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 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 origi-

nal 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.
[66 FR 41758, Aug. 9, 2001]
§§ 1744.22-1744.29

[Reserved]

§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 in this
section.
(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
§1744.40 or §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 pani passu or pro-rata basis with

386

§ 1744.30

Rural Utilities Service, USDA
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 112 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 the original remaining years to maturity;
(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 contained 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 pani passu or pro-rata basis with all
other notes secured under the Govern-

ment 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 and additional
plant 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

387

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§1744.30

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 not less than the original remaining years to maturity;
(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 pani 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 DSO 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 and additional
plant 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

388

Rural Utilities Service, USDA

§ 1744.30

period not less than the original remaining years to maturity;
(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 contained 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 §1744.30 by providing the following:
(1) The board resolution cited in
§1744.55(b)(1) and the opinion of counsel
cited in §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 contained, 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 and the private lender 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 pani 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.
(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 government is not 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

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7 CFR Ch. XVII (1-1-16 Edition)

§ 1744.40
mortgage, the private lender shall follow the procedures established in
§§1744.40 or 1744.50, as appropriate. Except for the actions of the government
expressly established in §1744.40, the
government undertakes no obligation
to effectuate an automatic lien accommodation. 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.
[66 FR 41760, Aug. 9, 2001]
§1744.40 Act purposes.
(a) Borrowers are encouraged to submit requests for accommodation of the
Government's lien on the borrower's
system in order to facilitate obtaining
financing from private lenders for purposes provided in the RE Act.
(b) The Administrator will consider
requests for the subordination of the
Government's lien on after-acquired
property which will enable borrowers
to obtain financing from private lend-

ers for purposes provided in the Act:
Provided, however, that property integral to the operation of projects financed with loans made or guaranteed
by RUS shall be financed with funds
obtained through lien accommodations
instead of lien subordinations, unless
the Administrator determines that it is
in the Government's interest to do otherwise.
[51 FR 32430, Sept. 12, 1986. Redesignated at
55 FR 39396, Sept. 27, 1990, and further redesignated at 66 FR 41760, Aug. 9, 2001]
§§1744.41-1744.49 [Reserved]
§1744.50 Non-Act purposes.
(a) The Administrator will consider
requests for the accommodation of the
Government's lien on the borrower's
system or the subordination of the
Government's lien on after-acquired
property which will enable the borrowers to obtain financing from private
lenders for the purpose of providing
new telecommunication services which
may not be eligible for financing under
the Act if the Administrator is satisfied that:
(1) The borrower will have the ability
to repay its existing and proposed indebtedness;
(2) The security for outstanding Government loans and guarantees is reasonably adequate and will not be adversely affected by the accommodation
or subordination; and
(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.
(b) In determining that the security
for outstanding Government loans and
guarantees is reasonably adequate and
will not be adversely affected by the
accommodation or subordination the
Administrator will consider, among
other matters, when applicable, the following:
(1) Market forecasts for the project;
(2) Projected revenues, expenses and
net income of the borrower's existing
system and the project;
(3) Maximum debt service on indebtedness of both the borrower's system
and the project;

390

Rural Utilities Service, USDA

§§1744.56-1744.59

(4) Projected rate of return on the
borrower's investment in the project;
(5) Fair market value of property acquired by the borrower as part of the
project;
(6) Impact of the project on the ratio
of the borrower's secured debt to assets;
(7) Projected growth in borrower's
system and project equity; and
(8) Amount of funds available for
plant additions, replacements and
other similar costs of the system and
the project.
(c) In determining whether the accommodation or subordination is in
the interests of the Government, the
Administrator may consider, among
other matters, whether the project will
improve the borrower's financial
strength and the assurance of repayment of Government debt.
[51 FR 32430, Sept. 12, 1986. Redesignated at
55 FR 39396, Sept. 27, 1990, as amended at 59
FR 43716, Aug. 25, 1994. Redesignated at 66 FR
41760, Aug. 9, 2001, as amended at 66 FR 41763,
Aug. 9, 2001]
§§1744.51-1744.54 [Reserved]
§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.
(b) An application for a lien accommodation or subordination shall in-

elude the following supporting information:
(1) A board Resolution from the applicant requesting the lien accommodation or subordination and stating the
general purpose for which the funds
from the private lender will be used,
the proposed amount of the loan, and
the proposed terms and conditions of
the loan;
(2) An opinion from counsel representing the applicant that the applicant has the authority under its articles of incorporation, bylaws, and
under applicable state law to undertake the project;
(3) Engineering and pertinent studies
related to the projects or purposes to
be financed, when applicable;
(4) Feasibility studies with pro forma
financial statements showing the ability to repay the loan and provide an
appropriate margin or net income;
(5) Any other information or documentation deemed pertinent by the
borrower or the Administrator in support of the application.
(c) When the Administrator makes a
determination that an application for
an accommodation or subordination
will not be approved the Administrator
shall set forth the reasons therefor in
writing and furnish such determination
and reasons to the borrower within 30
days of the determination.
[51 FR 32430, Sept. 12, 1986. Redesignated at
55 FR 39396, Sept. 27, 1990, and further redesignated at 66 FR 41760, Aug. 9, 2001, as
amended at 66 FR 41763, Aug. 9, 2001]
§§1744.56-1744.59 [Reserved]

391

Pt. 1744, Subpt. B, App. A

7 CFR Ch. )(VII (1-1-16 Edition)

APPENDIX A TO SUBPART B OF PART 1744—STATEMENT, CERTIFICATION, AND AGREEMENT OF BORROWER'S PRESIDENT OF BOARD OF DIRECTORS REGARDING REFINANCING AND REFUNDING NOTES PURSUANT TO 7 CFR 1744.30(C)
, am President of
(Name of
(Name of President)
Borrower)
(the "borrower"). The borrower proposes to issue notes (the
and delivered to
"private lender notes"), to be dated on or about
(the "private lender"). I am duly authorized to make
(Name of Private Lender)
and enter into the following statements, certifications, and agreements for the purpose of
inducing the United States of America (the "government"), to give automatic approval to
the issuance of the private lender notes pursuant to 7 CFR 1744.30(c).
(a) The private lender:
is a mortgagee under the existing mortgage securing the government's loan to
the borrower (the "government mortgage"); or
is not a mortgagee under the government mortgage and the borrower has
executed the attached form of supplemental mortgage as provided in 7 CFR
1744.30(h).
(b) Thereby certify that all other requirements of 7 CFR 1744.30(c) are met; said
requirements being as follows:
(1) No default has occurred and is continuing under the government mortgage;
(2) The principal amount of such refinancing or refunding notes, which is
dollars, will not be greater than 112 percent of the then outstanding principal
balance of the notes being refinanced or refunded; such outstanding principal
balance being
dollars;
(3) The weighted-average life of the private loan evidenced by the private lender notes,
which is
years, will not exceed the weighted-average remaining life of the
notes being refinanced or refunded, which is
years;
(4) Except as provided in the government mortgage, the borrower has not agreed to any
restrictions or limitations on future loans from the Rural Utilities Service (RUS);
and
(5) This certificate is being delivered to RUS at least 10 business days before the
private lender notes are to be executed.
(c) The borrower agrees that the private lender notes will provide for substantially level
debt service or level principal amortization.
(d) All terms not defined herein shall have the meaning set forth in 7 CFR 1744, subpart B.

Signed

Date

Name
Name and Address of Borrower:
[66 FR 41763, Aug. 9, 2001]

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Rural Utilities Service, USDA

Pt. 1744, Subpt. B, App. B

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(0)
I/We, (Name of Independent Certified Public Accountant) , hereby certify the
following with respect to the note or notes (the "private lender notes") to be issued by
("the borrower'') on or about (Date private lender notes are
(Name of Borrower)
dollars:
to be Signed) , evidencing a total loan principal of
(a) 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 2 fiscal years immediately preceding the issuance of the
private lender notes. The TIER and DSC ratios achieved are as follows:
TIER

Year

DSC

(b) The borrower's equity percentage, as of the most recent fiscal year-end, was not less
than 25 percent:
Total
Year

Equity

Date

Signed

Name and address of CPA Firm:

All terms not defined herein shall have the meaning set forth in 7 CFR 1744, Subpart B.
[66 FR 41763, Aug. 9, 2001]

393

7 CFR Ch. XVII (1-1-16 Edition)

Pt. 1744, Subpt. B, App. C

APPENDIX C TO SUBPART B OF PART 1744—STATEMENT, CERTIFICATION, AND AGREEMENT OF BORROWER'S PRESIDENT OF BOARD OF DIRECTORS REGARDING NOTES TO
BE ISSUED PURSUANT TO 7 CFR 1744.30(d)
, am President of
(Name of Borrower) (the
(Name of President)
"borrower"). The borrower proposes to issue notes (the "private lender notes"), to be dated on or
(Name of Private Lender)
(the "private
about
and delivered to
lender"). I am duly authorized to make and enter into the following statements, certifications, and
agreements for the purpose of inducing the United States of America (the "government"), to give
automatic approval to the issuance of the private lender notes pursuant to 7 CFR 1744.30(d).
(a) The private lender:.
is a mortgagee under the existing mortgage securing the government's loan to the
borrower (the "government mortgage"); or
is not a mortgagee under the government mortgage and the borrower has executed the
attached form of supplemental mortgage as provided in 7 CFR 1744.30(h).
(b) I have reviewed the certificate of the independent certified public accountant also being
delivered to the government in connection with the private lender notes to be issued pursuant to
7 CFR 1744.30(d) and concur with the conclusions expressed therein.
(c) I hereby certify that all other requirements of 7 CFR 1744.30(d) are met as follows:
(1) 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
which 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;
(2) No default has occurred and is continuing under the government mortgage;
(3) The weighted-average life of the private loan evidenced by the private lender notes, which
years, does not exceed the weighted-average remaining useful lives of the assets
is
being financed, which is
years;
(4) Except as provided in the Government mortgage, the borrower has not agreed to any
restrictions or limitations on future loans from the Rural Utilities Service (RUS); and
(5) This certificate is being delivered to RUS at least 10 business days before the private lender
notes are to be executed.
(d) The borrower agrees that:
(1) 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 7 CFR 1744.30 and such construction or purchase is expected to be completed not
later than 4 years after execution of such notes;
(2) The private lender notes will provide for substantially level debt service or level principal
amortization;
(3) All of the assets financed by the private lender notes will be purchased or otherwise
procured in bona fide arm's length transactions; and
(4) 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.
(e) All terms not defined herein shall have the meaning set forth in 7 CFR 1744, Subpart B.
Signed

Date

Name
Name and Address of Borrower:
[66 FR 41763, Aug. 9, 2001]

394

Pt. 1744, Subpt. B, App. D

Rural Utilities Service, USDA

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
1/We, (Name of Independent Certified Public Accountant) , hereby certify the
following with respect to the note or notes (the "private lender notes") to be issued by
("the borrower") on or about (Date private lender notes are
(Name of Borrower)
dollars:
to be Signed) ,evidencing a total loan principal of
(a) 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 2 fiscal years immediately preceding the issuance of the
private lender notes. The TIER and DSC ratios achieved are as follows:
TIER

Year

DSC

(b) The borrower's equity percentage, as of the most recent fiscal year-end, was not less
than 45 percent.

Year

Total
Equity

Date

Signed

Name and address of CPA Firm:

All terms not defined herein shall have the meaning set forth in 7 CFR 1744, Subpart B.
[66 FR 41763, Aug. 9, 2001]

395

7 CFR Ch. XVII (1-1-16 Edition)

Pt. 1744, Subpt. B, App. E

APPENDLX E TO SUBPART B OF PART 1744—STATEMENT, CERTIFICATION, AND AGREEMENT OF BORROWER'S PRESIDENT OF BOARD OF DIRECTORS REGARDING NOTES To
BE ISSUED PURSUANT TO 7 CFR 1744.30(e)
, am President of
(Name
(the "borrower"). The borrower proposes to issue notes (the
and delivered to
"private lender notes"), to be dated on or about
(the "private lender"). Jam duly authorized to make
(Name of Private Lender)
and enter into the following statements, certifications, and agreements for the purpose of
inducing the United States of America (the "government"), to give automatic approval to
the issuance of the private lender notes pursuant to 7 CFR 1744.30(e).
(Name of President)

of Borrower)

(a) The private lender:
is a mortgagee under the existing mortgage securing the government's loan to
the borrower (the "government mortgage"); or
is not a mortgagee under the government mortgage and the borrower has
executed the attached form of supplemental mortgage as provided in 7 CFR
1744.30(h).
(b) I have reviewed the certificate of the independent certified public accountant also being
delivered to the government in connection with private lender notes to be issued
pursuant to said § 1744.30(e) and concur with the conclusions expressed therein.
(c) I hereby certify that all other requirements of 7 CFR 1744.30(e) are met; said
requirements being as follows:
(1) 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
, which is not less than 1.6, on a pro-forma basis, after taking
lender notes is
into account the effect of the private lender notes on the total long-term debt of the
borrower;
(2) No default has occurred and is continuing under the government mortgage;
(3) The weighted-average life of the private loan evidenced by the private lender notes,
years, does not exceed the weighted-average remaining useful lives
which is
years;
of the assets being financed, which is
(4) Except as provided in the government mortgage, the borrower has not agreed to any
restrictions or limitations on future loans from the Rural Utilities Service "RUS";
and
(5) This certificate is being delivered to RUS at least 10 business days before the
private lender note or notes are to be executed.
(d) The borrower agrees that:
(1) 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 7 CFR 1744.30 and such
construction or purchase is expected to be completed not later than 4 years after
execution of such notes;
(2) The private lender notes will provide for substantially level debt service or level
principal amortization;

396

Pt. 1744, Subpt. B, App. E

Rural Utilities Service, USDA

(3) All of the assets financed by the private lender notes will be purchased or otherwise
procured in bona fide arm's length transactions;
(4) The proceeds of the private lender notes will be lent to, (Name of Subsidiary) ,
a wholly-owned subsidiary of the borrower pursuant to terms and conditions agreed
upon by the borrower and subsidiary;
(5) 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;
(6) The borrower will promptly report to RUS any default by the subsidiary or other
actions that impair or may impair the subsidiary's ability to repay its private loans;
and
(7) 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.
(e) All terms not defined herein shall have the meaning set forth in 7 CFR 1744, Subpart B.

Date

Signed
Name

Name and Address of Borrower:

[66 FR 41763, Aug. 9, 2001]

397

7 CFR Ch. XVII (1-1-16 Edition)

Pt. 1744, Subpt. B, App. F

APPENDIX F TO SUBPART B OF PART 1744—FORM OF SUPPLEMENTAL MORTGAGE
, (hereinafter
Supplemental Mortgage and Security Agreement, dated as of
sometimes called this "Supplemental Mortgage") is made by and among
(hereinafter called the "Mortgagor"), a
, and the
corporation existing under the laws of the State of
UNITED STATES OF AMERICA acting by and through the Administrator of the Rural Utilities
Service (hereinafter called the "Government"),
), a
(Supplemental Lender) (hereinafter called
, and is intend to confer rights and benefits on both the
existing under the laws of
and
Government and
in accordance with this Supplemental Mortgage and
the Original Mortgage (hereinafter defined) (the Government and the Supplemental Lenders being
hereinafter sometimes collectively referred to as the "Mortgagees").
Recitals
Whereas, the Mortgagor, the Government and
are parties to that certain Restated Mortgage (the "Original Mortgage" as identified in Schedule "A" of this
Supplemental Mortgage) originally entered into between the Mortgagor, the Government acting by and
through the Administrator of the Rural Utilities Service (hereinafter called "RUS"), and
; and
Whereas, the Original Mortgage as the same may have been previously supplemented,
amended or restated is hereinafter referred to as the "Existing Mortgage"; and
Whereas, the Mortgagor deems it necessary to borrow money for its corporate purposes and
to issue its promissory notes and other debt obligations therefor, and to mortgage and pledge its property
hereinafter described or mentioned to secure the payment of the same, and to enter into this Supplemental
Mortgage pursuant to which all secured debt of the Mortgagor hereunder shall be secured on parity, and to
as a Mortgagee and secured party hereunder and under the Existing
add
Mortgage (the Supplemental Mortgage and the Existing Mortgage, hereinafter sometimes collectively
referred to the "Mortgage"); and
Whereas, all of the Mortgagor's Outstanding Notes listed in Schedule "A" hereto is secured
Rani passu by the Existing Mortgage for the benefit of all of the Mortgagees under the Existing Mortgage;
and
Whereas, by their execution and delivery of this Supplemental Mortgage the parties hereto
do hereby secure the Additional Notes listed in Schedule "A" ((hereinafter called the Supplemental Lender
Notes)) pani passu with the Outstanding Notes under the Existing Mortgage {and do hereby add
as a Mortgagee and a secured party under the Existing Mortgage); and

1 If the Rural Telephone Bank is a party to the original Mortgage, then "Rural Telephone Bank (herein after
called the "Bank")" should be added here and the words "and the Bank" should be added after each
reference to the Government.
2 If the Existing Mortgage already defines a Supplemental Lender, then the supplemental lender in the
present transaction is to be called the "Second Supplemental Lender" and the supplemental mortgage
should refer to both the supplemental lender and the second supplemental lender.
3 If the Second Supplemental Lender is being added to the mortgage, the reference here should be to the
"Second Supplemental Lender's Notes."

398

Pt. 1744, Subpt. B, App. F

Rural Utilities Service, USDA

Whereas, all acts necessary to make this Supplemental Mortgage a valid and binding legal
instrument for the security of such notes and related obligations under the terms of the Mortgage, have been
in all respects duly authorized:
Now, Therefore, This Supplemental Mortgage Witnesseth: That to secure the payment of
the principal of (and premium, if any) and interest on all Notes issued hereunder according to their tenor and
effect, and the performance of all provisions therein and herein contained, and in consideration of the
covenants herein contained and the purchase or guarantee of Notes by the guarantors or holders thereof, the
Mortgagor has mortgaged, pledged and granted a continuing .security interest in, and by these presents does
hereby grant, bargain, sell, alienate, remise, release, convey, assign, transfer, hypothecate, pledge, set over
and confirm, pledge and grant to the Mortgagees, for the purposes hereinafter expressed, a continuing
security interest in all property, rights, privileges and franchises of the Mortgagor of every kind and
description, real, personal or mixed, tangible and intangible, of the kind or nature specifically mentioned
herein or any other kind or nature, in accordance with the Existing Mortgage owned or hereafter acquired by
the Mortgagor (by purchase, consolidation, merger, donation, construction, erection or in any other way)
wherever located, including (without limitation) all and singular the following:
A.

all of those fee and leasehold interests in real property set forth in Schedule "B" hereto, subject in
each case to those matters set forth in such Schedule; and

B.

all of those fee and leasehold interests in real property set forth in
or in any restatement, amendment or supplement thereto,

C.

the Existing Mortgage
; and

all of the kinds, types or items of property, now owned or hereafter acquired, described as Mortgaged
Property in the Existing Mortgage or in any restatement, amendment to supplement thereto as
Mortgaged Property.

It is Further Agreed and Covenanted That the Original Mortgage, as previously restated,
amended or supplemented, and this Supplement shall constitute one agreement and the parties hereto shall
be bound by all of the terms thereof and, without limiting the foregoing:
1.
2.

3.

4.
5.

All terms not defined herein shall have the meaning given in the Existing Mortgage.
The Supplemental Lender Notes are "notes" and "Additional Notes" under the terms of the Existing
Mortgage and the Supplemental Mortgage is a supplemental mortgage under the terms of the Existing
Mortgage.
The holders of the Supplemental Lenders Notes shall be considered as a class, so that in those instances
where the Existing Mortgage providers that the holders of majority of the notes issued to other Mortgagees,
voting as a class, may approve certain actions or make certain demands, so shall the holders of the
Supplemental Lender Notes be considered to be a class with rights and authority equal to those of the holders
of notes issued to such other Mortgagees.
The Maximum Debt Limit for the Existing Mortgage shall be as set forth in Schedule "A" hereto.
The [Second] Supplemental Lender shall immediately cease transfer of funds covered by the Supplemental
Lender Notes if it receives notice that RUE has determined that the borrower's financial condition has
deteriorated to a level that impairs the security or feasibility of the government's loans to the borrower.
as

In Witness Whereof,
Mortgagor4

4 Spaces are to be provided for the execution by all other parties, together with the printed name and office
of the executing individual and the name of the organization represented. Each execution must be
acknowledged.

399

7 CFR Ch. XVII (1-1-16 Edition)

§1744.60

Supplemental Mortgage Schedule A
Maximum Debt Limit and Other Information
1.

The Maximum Debt Limit is $

2.

The Original Mortgage as referred to in the first WHEREAS clause above is more
particularly described as follows:

3.

The Outstanding Notes referred to in the fourth WHEREAS clause above are more
particularly described as follows:

4.

The Additional Notes described in the fifth WHEREAS clause above are more
particularly described as follows:

Supplemental Mortgage Schedule B
Property Schedule
The fee and leasehold interests in real property referred to in clause A of the
granting clause are more particularly described as follows:
[66 FR 41763, Aug. 9, 2001]
§1744.61 [Reserved]

Subpart C—Advance and
Disbursement of Funds
SOURCE: 54 FR 12186, Mar. 24, 1989, unless
otherwise noted. Redesignated at 55 FR 39396,
Sept. 27, 1990.

§ 1744.60 General.
(a) The standard loan documents (as
defined in 7 CFR part 1758) contain provisions regarding advances and disbursements of loan funds by telephone
borrowers. This part implements certain of the provisions by setting forth
requirements and procedures to be followed by borrowers in obtaining advances and making disbursements of
loan and nonloan funds.
(b) This part supersedes any sections
of RUS Bulletins with which it is in
conflict.

§1744.62 Introduction.
RUS is under no obligation to make
or approve advances of loan funds unless the borrower is in compliance with
all terms and conditions of the loan
documents. The borrower shall use
funds in its construction fund only to
make disbursements approved by RUS.
§1744.63 The telephone loan budget.
When the loan is made, RUS provides
the borrower a Telephone Loan Budget,
RUS Form 493. This budget divides the
loan into budget accounts such as
"Engineering." When a contract or
other document is approved by RUS,
funds are encumbered from the appropriate budget account. See 7 CFR part
1753.

400