This will give Farmer Mac with additional capital, at what the company calls ‘a significantly lower cost.’  This sale of subsidiary preferred stock is meant to pay back its business partners in full that invested in 2008 and meant to strengthen the books under its Congressional mission.

The stated dividend rate is 8.875%, 8 7/8, while after consideration of the consolidated tax benefits to Farmer Mac the net effective cost is only 5.77%.

The net cost on Farmer Mac’s consolidated financial statements will be about $3.6 million per quarter, which comes to $14.4 million per year.  The 8.875% dividend rate is in effect until March 30, 2015, when the preferred stock becomes callable and there is a rate step-up.  The quarterly and annual cost of the existing $150 million of Series B preferred stock was $4.5 million and $18.0 million based on the 2010 dividend rate of 12%.  That rate would have risen to 14% at the end of 2010 and 16% in 2011.

The company further noted that the benefit of this reduction in its dividend costs can be used to further capitalize new growth whiling improving Farmer Mac’s stockholder value.  Federal Agricultural Mortgage Corp. (AGM) shares closed higher by 3.9% on an unofficial basis at $7.16 for the common equity.  The 52-week range is $2.40 to $11.49, while the common equity market cap value is listed as $72.7 million without any effect of this financing.

Because of the size and because of the former structure, we show no real analyst expectations and have no formal coverage of this one.

JON C. OGG

Its choices were to either sell assets or raise cash via securitysales, both of which will ultimately leave it smaller or more dilutedfor existing holders. It appears it has decided to raise cash in a saleof $65 million via the sale of non-voting series B preferred stock. Itslists the investors as AgFirst Farm Credit Bank; AgriBank, FCB; CoBank,ACB; Farm Credit Bank of Texas; U.S. AgBank, FCB and ZionsBancorporation. 

Farmer Mac noted that this financing satisfies its previously announcedintent to implement strategies to restore its capital position and tomeet regulatory requirements.

This comes at a steep price tag for a company in the business of makingloans in a de-leveraged environment.  This perpetual preferred issuanceis not convertible but its dividends are a step-up with year 1 at 10%,year 2 at 12%, year 3 at 14%, and 16% thereafter.  These are redeemablein whole by Farmer Mac after 9 months.

Separately, Framer Mac is naming Michael Gerber as acting President& CEO of the group.  He is replacing Henry Edelman immediately.Mr. Gerber has been on Farmer Mac Board of Directors since June 2007and he has been the President and Chief Executive Officer of FarmCredit of Western New York since 1998.

Shares are up over 40% at this point pre-market.  Investors bettinghere better hope that it Farmer Mac can redeem those preferred sharesin 9 months.  Otherwise, it’s going to have to charge unreal rates on its loans to farmers.

Jon C. Ogg
October 1, 2008