Accrued Interest: Interest earned but not paid since the last due date.

Accrual Accounting: The method of recognizing revenues as a firm renders services, independent of the time when it receives cash. This system recognizes expenses in the period when it recognized the related revenue, independent of the time when it pays cash.

Affirmative Covenants: Pledges in the loan documents that the borrower (mortgagor) will accomplish certain acts; e.g., timely submission of financial reports and audit.

Amortization: The process of liquidating or extinguishing a debt with a series of payments to the creditor using an amortization schedule which is a table showing the allocation between interest and principal. The term has come to mean writing off or liquidating the cost of an asset.

ARPU: Average Revenue Per User. A metric especially used by wireless providers to measure the quality of the customer base.

Assignment (of leases, contracts, etc.): Transfer of legal ownership of an asset through its sale. Contrasts with pledging of assets, where the assets serve as collateral for a loan.

Balloon Payment: When the loan requires relatively equal periodic payments with a large final payment, this large, final payment is called the balloon payment.

Basis Point: A basis point is one one-hundredth of one percent (.01 of one percent). For example, if RTFC's long-term loan rate were 8.75 percent and the Board reduced the rate to 8.50 percent, the RTFC loan rate would have been reduced by 25 basis points.

Book Value: The amount at which an asset is carried on the books of the owner. Generally the initial cost les depreciation. The book value of assets does not necessarily have a significant relationship to market value.

Bullet Maturity: When no principal payments are made before the loan maturity date, at which time a "bullet payment" is due to retire the principal balance.

Caps: A loan service that sets an upper limit or ceiling on the interest rate that will apply to a loan.

Cash Basis Accounting: A system of accounting in which the firm recognizes revenues when it receives cash and recognizes expenses as it makes disbursements.

Capex: Abbreviation for capital expenditures.

Capital Credits (or "Patronage Capital"): The amounts of a cooperative's net margins allocated to individual patron. The allocation is usually based upon the patron's use of the cooperative's service. RTFC's member patronage is determined on the basis of the total interest a member pays (on outstanding RTFC debt) during a fiscal year. There are a number of methods of capital credit retirement. The most commonly used are "last in, first out" (LIFO), "first in, first out" (FIFO), and the percentage method.

Cash Flow: Net income or margins plus depreciation, plus amortization.

Co borrower: One of two or more entities that borrowed money from a lender, with ultimate full responsibility for repayment.

Collars: A loan service that supplements the interest cap with a provision reflecting the borrower's certainty that interest rates will not drop below a certain level. If market rates fall below that floor, the borrower reimburses the Cap Provider for the rate difference.

Collateral:   Assets that a borrower pledges as security for a loan. Rural telecommunications companies pledge their plant facilities as collateral in order to obtain long-term financing from RUS and RTFC. Additionally, many will pledge stock in subsidiaries, bonds and other marketable securities as collateral for loans.

Commercial Paper: Short-term investments, (typically unsecured and usually issued by corporate borrowers with high credit ratings) having a definite maturity date. CFC sells commercial paper to members and investors with maturities ranging from 1 to 270 days. CFC's commercial paper pays investors money market rates and serves as an excellent way to earn a return on funds not in immediate use.

Commitment Fee: The fee paid by an applicant for a loan to the lender in consideration of the lender going forward with loan underwriting.

Common Equity: The book value of a firm. The sum of the par value of the firm's common stock and retained earnings.

Conditional Commitment Letter: A letter that a lender (such as RTFC), after an initial analysis of a loan proposal, sends to an applicant offering to consider a loan. Upon receiving a commitment fee, the lender will proceed to underwrite the loan and offer final terms or reject the loan request.

Consolidation (financial statements): Statements that are issued by legally separate companies and that show financial position and income, as they would appear if the companies were one economic entity.

Contingent Liability: The term applied to an obligation which does not become enforceable until a specific event occurs. For example, the obligation of a guarantor of a loan is to make good the payment of the loan only in the contingency that the borrower defaults. The actual liability exists with the borrower. It becomes a primary liability of the guarantor only if the borrower fails to meet the terms of the loan.

Covenant: A promise to do or refrain from doing specified actions usually contained in a legally enforceable, formal document, such as RTFC's loan documents.

Credit Rating: An estimate of the credit-worthiness of an organization involved in the sale of securities by a credit servicing organization. Moody's Investors Services and Standard and Poor's Corporation are examples of such organizations.

Current Ratio: Sum of current assets divided by sum of current liabilities.

Debt Service: Interest payment requirements plus the stipulated payment of principal on outstanding debt, usually reported on an annual basis.

Debt Service Coverage (DSC) ratio: A financial measurement relating to the borrower's ability to generate sufficient funds to cover the cash requirements of its total indebtedness (principal and interest) on an annual basis.

Debt-to-Equity Ratio: The amount of a company's indebtedness in relation to its equity. It generally represents the relationship of debt to the book value of the company.

Default: The failure to perform an obligation previously agreed upon. In a financial sense, the term generally refers to a failure of a borrower to pay the principal or interest on its debt or to meet other obligations under the loan agreement or indenture. If default is caused by a minor omission that is remedied promptly, it is known as a technical default. The term is commonly used when a legally constituted governing body fails to pay the principal or interest on its bonds, or to meet other financial obligations on maturity.

Discounted Cash Flow: A valuation method in which free cash flow is projected over a long period (10 or more years) and a present value of the cash flows is computed.

Due Diligence: A reasonable investigation conducted by the parties involved in preparing a registration statement to confirm that the statements contained therein are true and that no material facts are omitted.

EBIT: Earnings before interest and taxes.

EBITDA: Earnings before interest, taxes, depreciation, and amortization; acronym used by analysts to focus on a particular measure of cash flow used in valuation. Sometimes referred to as Operating Cash Flow.

EBITDA Margin: EBITDA / Operating Revenues

EBITDA Multiple: A valuation or total debt guideline—how many times its EBITDA a business is worth or how many times a business' EBITDA a lender will lend.

Effective Interest Rate: The true cost of borrowed money, including the interest paid for the use of the money plus all other related costs associated with the borrowing, usually expressed as an annual percentage rate.

Encumbered Property: Property to which one has title, but against which another has some claim or interest.

Equity: The ownership right or the risk interest in property. It can also be described as the monetary value of a property or business that exceeds the claims and/or liens against it by others. In a cooperative, equity is the book value of member ownership.

Equity Subscription Agreements: An agreement on the part of a business' owner(s) to contribute additional equity to the enterprise in specified amounts according to a schedule. The agreement is usually made to satisfy equity requirements of a lender.

Escrow: A written agreement (or instrument) setting up the allocation of funds or securities deposited by the grantor to a third party, called the escrow agent, for the eventual benefit of the second party, called the grantee. The escrow agent holds the deposit until certain conditions have been met. The grantor can only get the deposit back if the grantee fails to comply with the terms of the contract. The grantee can only receive the deposit when the conditions have been met.

Fed Funds Rate: The interest rate banks charge each other for the use of federal funds. The rate is for overnight loans to banks that need cash to meet their reserve requirements.

Financial Statements: The balance sheet, income statement, statement of retained earnings, statement of cash flows, statement of changes in owner's equity. See the following terms, which are related to Financial Statements:

• Audit: Systematic inspection of a firm's accounting records involving analyses, tests and confirmations. RTFC requires that audits be performed by independent auditors. Audits include the financial statements as well as notes to the financial statements and the auditor's report. The auditor's report is a statement of the work done and an opinion of the financial statements.


• Reviewed: Financial statements reviewed by a licensed CPA who has not rendered an opinion regarding their accuracy or compliance with GAAP.


• Management Prepared: Financial statements prepared by corporate management and not audited or reviewed by an independent auditor.


• Interim: Financial statements issued for periods less than the regular, annual accounting period.


• Unqualified Opinion: A "clean" opinion, wherein the auditor indicates no exceptions or qualifications to its opinion that the statements fairly present the financial position, results of operations and cash flows of the firm, and is in conformity with GAAP.


• Qualified Opinion: The auditor notes one or more items in the firm's accounting which are not in accordance with GAAP and prevent the issuance of a "clean" opinion."


• Adverse Opinion: Qualification(s) are so material that the auditor cannot express an opinion as to the fairness of the financial statements as a whole. (i.e., financial statements are not prepared in accordance with GAAP.)

Fitch Ratings: An investor's rating service. Fitch's ratings of bonds and other debt instruments are intended to give potential buyers of those instruments an appraisal of the issuers' financial strength.

Fixed Charge Coverage Ratio: Net income before interest expense and tax expense in relation to interest expense. Same as TIER.

Fixed Rate Debt: Debt with an interest rate fixed for a set period, up to the term of the loan.  

Forward Caps: A rate cap agreement that specifies a future period in which the caps will take effect as conditions warrant.

Forward Rate Agreement: An arrangement that allows a borrower to fix rates based on current market conditions for loan advances to be taken later.

Free Cash Flow: Cash flow, less funds expended for capital assets.

GAAP: Generally Accepted Accounting Principles.

Goodwill: The excess of cost of an acquired firm or asset over the current book value of the firm or assets.

Guarantee: A promise to answer for payment of debt or performance of some obligation if the person (or corporation) liable for the debt or obligation fails to perform. The following three definitions refer to types of guarantees:

• Joint & Several: Where there are several guarantors, each guarantor is liable for the full amount of the guarantee


• Limited & Several:   Where there are several guarantors, each guarantor has its obligation capped.


• Pro Rata: Again with multiple guarantors, each guarantor's portion of the total guarantee is limited to an agreed upon percentage.

Interest Rate Adder: A percentage of additional interest added to a lender's standard rate to reflect additional risk or expense of a particular transaction.

Interest Rate Swap: A means of hedging a borrower's interest rate exposure by trading interest rate obligations with another borrower.

Investment Bankers: Financial intermediary that performs variety of services, including aiding the sale of securities, facilitating mergers or acquisitions, acting as brokers and trading for their own accounts.  

Joint Mortgage: A mortgage in which two or more mortgagees share the lien on the mortgagor's assets.

Lease: A sale of usage rights in an asset by one organization to another. In the lease transaction, one party, known as the lessor, grants to another party--the lessee--the rights of use, tenancy, or occupancy of the property. This property may be land, buildings, equipment, or other chattel property. The lease agreement describes the rights of the owner (lessor) and the renter (lessee), and recites the terms of periodic payment and the tenure of the lease. The property leased reverts to the owner at the expiration of the least agreement.

Lender Liability: The risk a lender is exposed to from entering into a relationship with a borrower that exceeds that of lender and borrower.

Letter of Credit: An instrument used by RTFC to provide proof of financial backing for members involved in projects requiring such backing. Letters of credit are generally irrevocable and can be drawn upon demand of the beneficiary.

Level Debt Service: Equal periodic payments, including principal and interest payments, used to fully retire the principal amount of a debt over the term of the loan. Although in level debt service the payment is the same, the ratio of interest and principal contained in each payment will vary over the loan's life. Still, each payment's interest and principal component, when combined, add up to the same total.

Level Principal Plus Interest: Periodic payments with the same amount of principal included in every payment. The total debt service payment will vary as interest declines as the principal is reduced.

Leverage Ratio: In the telecom industry, the ratio of debt to cash flow generated by the company.

LIBOR: A price index—the London Interbank Offered Rate.

Lien: The right of an organization or individual to control or to enforce a claim against property that it has as interest in, usually through a loan.

Lien Accommodation: As used in the rural telephone program, a lien accommodation involves an agreement on the part of RUS, which holds a first mortgage on all properties of the rural telephone borrowers, to provide a first mortgage lien on the borrower's facilities equal to RUS's lien on a pro rata basis to another lender, such as RTFC.

Line of Credit: In a line of credit agreement between a bank and a customer (RTFC and member), RTFC agrees to lend the member funds up to a previously agreed upon maximum amount. RTFC has the option to withdraw from the agreement if the financial status of the borrower changes, or if the borrower fails to use the line of credit for its intended purpose as per the agreement. The member may borrow as much of the "line" as is required and pays interest on the borrowed portion only and only for the period during which this portion is outstanding.   Lines of credit are widely used by large organizations to fund future commitments and purchases of inventory. RTFC requires periodic financial reports from the borrower systems so as to be constantly informed on their credit status.

Liquidity: Refers to the availability of cash or near cash assets to meet a firm's obligations. Liquid assets are cash, current marketable securities and sometimes current receivables.

Loan Capital Term Certificates (LCTC): Non-interest-bearing investments in CFC equity. Such certificates, which can be purchased either in installments with general funds or with a portion of loan funds, increase the borrower's equity in CFC and help CFC keep its loan interest rates down.

Loan Participation: A syndication. For loans of a large size a group of lenders will be formed, with each lender taking a share it is comfortable with. Thus the lenders "participate" in the loan.

Loan to Value: The amount of a loan relative to the value of the collateral.

Market Value: Value negotiated between a willing buyer and a willing seller; each acting rationally in their own self-interest.

Merger: A merger occurs when one organization loses its identity and its assets are combined with those of the surviving entity.

Mezzanine Debt: Subordinated debt in which the lender receives a portion of the equity of the firm in the form of warrants.  

Modified Debt Service Coverage (MDSC) ratio: A ratio that measures a borrower's ability to repay a loan. The MDSC ratio is calculated by totaling interest on long-term debt, depreciation and amortization expenses, operating margins, interest earned, and cash received as G&T and other capital credits and dividing that figure by total long-term debt exposure.

Moody's: Another bond rating service.

Mortgage: An instrument of conveyance of rights to property from a borrower to the lender. The mortgage is only a "conditional" conveyance, in that the property remains with the use and occupancy of the borrower as long as the borrower lives up to the conditions of the mortgage. The major conditions are the continual payment of interest and principal reduction as described in the mortgage. When the money is lent the lender has the right to take over the property, if the borrower fails to meet his obligations under the terms of the mortgage.

Mortgagor: The borrower.

Mortgagee: The lender.

Negative Covenants: Provisions in a loan agreement or mortgage in which the borrower is expressly forbidden to do certain things without prior approval by the lender.

Net Utility Plant: The total value of a borrower's physical plant plus construction work in progress, minus accumulated provision for depreciation and amortization. Used to measure the value of security on a loan.

Net Working Capital: The excess of current assets over current liabilities.

Operating DSC: Operating income (before deduction for interest expense) plus depreciation and amortization plus investment income divided by total interest expense plus scheduled principal payments on long-term debt.

Pari Passu: The status of lenders having equal, prorata claims on the collateral.

Performance Based Pricing: In pricing a loan the lender establishes certain performance milestones (e.g., number of subscribers, revenues, EBITDA), the achievement of which may earn the borrower rate reductions. Most often used in loans to start-ups.

Plant to Revenue Ratio: A measurement of the relative productivity of a borrower's physical plant, determined by comparing the plant value to the revenue it generates.

Prime Rate: The loan rate charged by commercial banks to their creditworthy customers.

Pro Forma Statements: Hypothetical forward looking financial statements. These are usually the basis for loan underwriting.

Pro Rata: Sharing of rights to collateral based on the proportion of a given lender's secured loans to total secured loans.

Rate Base: The net plant investment or valuation base on which the utility is entitled to earn a fair return.

Recapitalization: In the capital structure of a corporation, a major change that leads to changes in the rights, interests, and implied ownership of the various security owners; including common shareholders, preferred shareholders, unsecured creditors and secured creditors.

Representations & Warranties: Affirmative statements made in writing by one party to an agreement to the other parties to the agreement.

Risk Rating System: A lender's system of evaluating the credit quality of borrowers and individual credit facilities (loans).

Senior Secured Debt: The most senior claim against a firm's assets and earnings.

Standard & Poor's: Another bond rating agency.

Stop Order: A control mechanism used in lending to withhold funding until certain events occur or conditions are satisfied.

Subordinated Capital Certificate (SCC): An investment in RTFC. Currently borrowers must purchase SCCs equal to 10% of the amount of a loan. The SCC balance amortizes with the principal balance of a loan so that the 10 percent SCC-to-loan ratio is maintained.  

Syndicate: A group of investment bankers who, by agreement, among themselves, have joined together for the purpose of distributing a particular lot of securities. The syndicate manager is usually the bank that has made a successful bid for the wholesale purchase of the securities as a lot. The other banks in the syndicate agree to distribute a specified amount of the securities and the manager allots the securities to them on a pro rata basis. Upon final distribution of all securities, the syndicate is closed and the obligation of all members terminated. The following terms are related to syndicates:

• Agent Bank(s): A formal designation that applies to the bank that is responsible for negotiating, structuring, and overseeing a loan or commitment to a borrower in a syndicated transaction.


• Subordinated Debt: Debt with a claim on income or assets of lower priority than claims of other debt.

Technical Default: Failure to meet a minor requirement contained in the loan documents — one that is easily cured by remedy or waiver.

Term Loan: Usually a long-term loan with a tenure running beyond one year.

Term Sheet: A written outline provided to the applicant for a loan, setting out the terms and conditions under which the lender will make a loan.

TIER (Times Interest Earned Ratio): A measurement of an organization's ability to generate earnings adequate to meet interest payments on its total outstanding debt.   Net income plus interest plus taxes/interest.

Wavier & Modification Fee: The fee lenders charge on a borrower to waive or modify a covenant in the loan documents.

Warrant: A certificate entitling the holder to buy a specified number of shares of stock at a specified time at a specified price.