"...the company is in a precarious financial condition and could face severe financial distress..."
(Found on Bloomberg)
GOTHAM PARTNERS RELEASES RESEARCH REPORT ON FARMER MAC
(The following is a reformatted version of a press release issued by Gotham Partners Management and received via electronic mail. The release was confirmed by the sender.)
Gotham Partners Releases Research Report on Federal Agricultural Mortgage Corp. ("Farmer Mac" - NYSE: AGM)
New York, NY, May 23, 2002 - Gotham Partners Management Co., LLC ("Gotham"), an investment manager in New York City, today released its research, analysis and conclusions about Federal Agricultural Mortgage Corp. ("Farmer Mac" - NYSE ticker: AGM). The 48-page report is entitled "Buying the Farm - A Detailed Examination of Accounting, Investment, and Reserving Practices at the Federal Agricultural Mortgage Corporation." The report details Gotham's opinions on Farmer Mac and the bases for them.
The report is available on Gotham's website, www.gothampartners.com. Alternatively, Gotham will send a copy of the report, by email or regular mail, to anyone who requests it. Please contact Gotham by email (research@gothampartners.com) and state which form of delivery you prefer.
Based upon an examination of Farmer Mac's SEC filings dating back to 1989, as well as other relevant publicly available data, Gotham believes that the company is in a precarious financial condition and could face severe financial distress for the following reasons:
- Illusory Earnings. Gotham believes that Farmer Mac's earnings are overstated and may, in net economic effect, be illusory as a result of the company's inadequate levels of loan-loss reserves. Gotham believes that adjusting the reserves to more appropriate levels would likely have the effect of (1) eliminating most if not all retained earnings, (2) wiping out most if not all of the company's book value, and (3) putting the company out of compliance with its regulatory capital requirements, making it subject to receivership and/or bankruptcy.
- Inadequate Reserves, Growing Delinquencies, and Misleading Disclosure. Gotham believes that Farmer Mac has systematically underestimated reserves and has not increased reserves despite mounting delinquencies. Farmer Mac's reserves as a percentage of delinquent loans at 19.5% are approximately one- tenth the levels of comparable agricultural lending institutions and approximately one-eighth the levels of money center banks. Furthermore, Gotham believes that Farmer Mac's methodology for determining and disclosing delinquencies significantly understates actual delinquency and non-performance.
- Funding Risk. Farmer Mac has, over time, increased the proportion of its funding provided by commercial paper to $2.3 billion, or more than 72% of its total debt, and the average term of these discount notes has declined to approximately one week. The company's funding is dependent on its continued ability to refinance these short-term obligations. Adding to this risk is the apparent misperception in the debt market that Farmer Mac's debt has been rated Aaa by Moody's, as is the debt of Fannie Mae and Freddie Mac. In fact, Farmer Mac's debt is not rated by any rating agency.
- Asset-Liability Mismatch. Farmer Mac's assets and liabilities are substantially mismatched. As mentioned above, 72% of the company's liabilities are discount notes which have average terms of approximately one week. By contrast, a substantial portion of the company's assets are fixed-rate, long- term loans and mortgage-backed securities with maturities up to 30 years.
- Increasing Risk in Program Assets. Farmer Mac has taken increasing risk in its program assets (farm mortgages). Over the past five years, Farmer Mac has innovated new "products" and modified its lending criteria to enable it to grow assets and guarantees. The assumption of these new risks has coincided with a decline in the U.S. agricultural economy that has become increasingly dependent on U.S. government price supports. Gotham believes that one of Farmer Mac's new products, the Long Term Standby Purchase Commitment (LTSPC), is, in substance, a put option or long-term credit-default swap written by Farmer Mac to other banks. The company's $2.13 billion of LTSPCs at March 31, 2002 insure the credit quality and performance of designated farm loans and, as a result, suffer from an adverse-selection problem. The LTSPC program has created a potentially enormous unfunded additional liability for the company.
- Increasing Risk in Non-Program Assets. Farmer Mac has taken increasing risk in its non-program assets. The company modified its 1996 policy of investing its non-farm loan assets only in highly liquid, short-term U.S. Government and agency debt, AAA corporate debt and A1-P1 commercial paper. The company's changed policy allows it to invest in long-term equity securities and other lower-rated illiquid investments. Farmer Mac recently disclosed that it had purchased $167 million of private preferred stock issued by the banks from whom it buys loans and to whom it has issued LTSPCs.
- High Leverage. At March 31, 2002, Farmer Mac had a 43 to 1 ratio of on- and off-balance-sheet liabilities to regulatory capital ($5.76 billion to $134 million). Over the past six years, the company's liabilities and guarantee obligations have increased nine times while equity capital has increased less than three times.
- Inadequate Board Oversight, Conflicts of Interest and Excessive Compensation. Representatives of Farmer Mac's largest customers, who sell loans to Farmer Mac or purchase loan guarantees from the company, control the board with 10 of 15 seats, creating clear conflicts of interest. Gotham believes that those directors who do not suffer from these conflicts have exercised insufficient independence and oversight over the actions of interested directors and management. Management enjoys an excessive equity compensation program under which they have been granted options and restricted stock totaling 13% of the shares outstanding and will ultimately receive as much as 35% when the balance of the authorized option pool is granted. These options fully vest within two years from each award. Gotham finds this option program egregious in its size and in its accelerated vesting. Management's financial self-interest exacerbates its incentive to take on risk and overstate profitability.
- Overvaluation. Even if one were to accept Farmer Mac's earnings and book value as reported, Gotham believes that the company is materially overvalued at approximately 25 times earnings and 3.5 times book value. Similarly, Gotham believes that the company's debt securities trade at yields which do not adequately compensate investors for the underlying risks.
- Risk to the U.S. Taxpayer. If the company exhausts its reserves and other resources, Farmer Mac has the ability to borrow up to $1.5 billion from the U.S. Treasury only for the purpose of meeting the company's mortgage-backed securities guarantee and LTSPC liabilities. In the event of a continued deterioration in Farmer Mac's loan and guarantee portfolio, the U.S. taxpayer could bear significant losses from this $1.5 billion facility. This financing, however, is not permitted to be used to repay Farmer Mac's discount and medium- term note liabilities.
On Sunday, April 28, 2002, The New York Times (Money & Business, pg. 1) published a critical article on the company, entitled "Big-City Paydays at `Farmer Mac' - Pots of Gold for Its Executives, But Its Lending Risks Go Unnoticed." In a press release on April 29th, Farmer Mac asserted that some of The Times' criticisms sounded like what the company called "misconceived queries" by investors at a meeting which Gotham attended in early April. Gotham's questions may have been among the so-called "misconceived queries" that the company would prefer not to answer. Gotham's report details those questions - including some that management would not allow Gotham to ask - as well as the factual predicates for those questions.
Gotham welcomes a response from Farmer Mac and the analysts who cover it on the issues raised in its report. Gotham is willing to make its representatives available to discuss these issues with the company and/or its analysts in a public forum.
Gotham will be providing its report to Farmer Mac, its major shareholders, its auditors at Deloitte & Touche, analysts who follow the company, the Securities and Exchange Commission and the regulators at the Farm Credit Administration who oversee the company.
Disclaimer: Funds managed by Gotham and its affiliates own investments that are bearish on Farmer Mac's prospects. Gotham funds do not generally invest in short positions or similar investments, but did so here based upon its analysis of publicly available documents, general market data and other information. This report is not intended as investment advice to anyone. Others may disagree with some or all of Gotham's opinions. Gotham urges anyone interested in the company to read Farmer Mac's SEC filings and to consult whatever other sources they deem appropriate in order to form their own opinions on the topics covered in Gotham's report. #30#
Gotham Partners Management Co., LLC Contact: William Ackman - 212-286-0300 Email: research@gothampartners.com
(mv)PN |
