NOTE 12—GUARANTEES

We guarantee certain contractual obligations of our members so they may obtain various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member system defaults on its obligation to pay debt service, then we are obligated to pay any required amounts under our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member system. In general, the member system is required to repay any amount advanced by us with interest, pursuant to the documents evidencing the member system’s reimbursement obligation.

The following table summarizes total guarantees by type of guarantee and member class as of May 31, 2015 and 2014.



(Dollars in thousands)	2015		2014
Total by type:
Long-term tax-exempt bonds	$	489,520	$	518,360
Letters of credit	382,233		431,064
Other guarantees	114,747		115,398
Total	$	986,500	$	1,064,822

Total by member class:
CFC:
Distribution	$	172,104	$	165,559
Power supply	763,746		826,231
Statewide and associate	17,025		5,397
CFC total	952,875		997,187
RTFC	1,574		2,304
NCSC	32,051		65,331
Total	$	986,500	$	1,064,822

We guarantee debt issued in connection with the construction or acquisition of pollution control, solid waste disposal, industrial development and electric distribution facilities, classified as long-term tax-exempt bonds in the table above. We unconditionally guarantee to the holders or to trustees for the benefit of holders of these bonds the full principal, interest and in most cases, premium, if any, on each bond when due. If a member system defaults in its obligation to pay debt service, then we are obligated to pay any required amounts under our guarantees. Such payment will prevent the occurrence of an event of default that would otherwise permit acceleration of the bond issue. In general, the member system is required to repay any amount advanced by us with interest, pursuant to the documents evidencing the member system’s reimbursement obligation.

The maturities for the long-term tax-exempt bonds and the related guarantees run through calendar year 2042. Amounts in the table represent the outstanding principal amount of the guaranteed bonds. As of May 31, 2015, our maximum potential exposure for the $72 million of fixed-rate tax-exempt bonds is $102 million, representing principal and interest. Of the amounts shown in the table above for long-term tax-exempt bonds, $418 million and $445 million as of May 31, 2015 and 2014, respectively, are adjustable or floating-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we could be required to pay related to the remaining adjustable and floating-rate bonds. Many of these bonds have a call provision that in the event of a default allow us to trigger the call provision. This would limit our exposure to future interest payments on these bonds. Our maximum potential exposure is secured by a mortgage lien on all of the system’s assets and future revenue. If the debt is accelerated because of a determination that the interest thereon is not tax-exempt, the system’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan.

The maturities for letters of credit run through calendar year 2024. The amounts shown in the table above represent our maximum potential exposure, of which $63 million is secured as of May 31, 2015. As of May 31, 2015 and 2014 the letters of credit include $76 million and $125 million, respectively, to provide the standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members, respectively. Security provisions include a mortgage lien on substantially all of the system’s assets, future revenue and the system’s investment in our commercial paper.

In addition to the letters of credit listed in the table, under master letter of credit facilities in place as of May 31, 2015, we may be required to issue up to an additional $105 million in letters of credit to third parties for the benefit of our members. As of May 31, 2015, all of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance. Also, as of May 31, 2015 we had hybrid letter of credit facilities totaling $1,659 million that represent commitments that may be used for the issuance of letters of credit or line of credit loan advances, at the option of a borrower, and are included in unadvanced loan commitments for line of credit loans reported in “Note 3— Loans and Commitments.” Hybrid letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $360 million as of May 31, 2015. Prior to issuing a letter of credit, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions. The remaining commitment under hybrid letter of credit facilities of $1,299 million may be used for the issuance of letters of credit as long as the borrower is in compliance with the terms and conditions of the facility.

The maturities for other guarantees listed in the table run through calendar year 2025. The maximum potential exposure for these other guarantees is $115 million, all of which is unsecured.

As of May 31, 2015 and 2014, we had $434 million and $418 million of guarantees, respectively, representing 44% and 39%, respectively, of total guarantees, under which our right of recovery from our members was not secured.

In addition to the guarantees described above, as of May 31, 2015, we were the liquidity provider for a total of $494 million of variable-rate tax-exempt bonds issued for our member cooperatives. While the bonds are in variable-rate mode, in return for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. During the year ended May 31, 2015, we were not required to perform as liquidity provider pursuant to these obligations.

Guarantee Liability

As of May 31, 2015 and 2014, we recorded a guarantee liability of $20 million and $22 million, respectively, which represents the contingent and non-contingent exposures related to guarantees and liquidity obligations associated with our members’ debt. The contingent guarantee liability as of May 31, 2015 and 2014 was $1 million and $2 million, respectively, based on management’s estimate of exposure to losses within the guarantee portfolio. The remaining balance of the total guarantee liability of $19 million and $20 million as of May 31, 2015 and 2014, respectively, relates to our non-contingent obligation to stand ready to perform over the term of our guarantees and liquidity obligations that we have entered into or modified since January 1, 2003.

Activity in the guarantee liability account, which is presented in other liabilities, is summarized below as of and for the years ended May 31, 2015, 2014 and 2013.



(Dollars in thousands)	2015			2014			2013
Beginning balance	$	22,091		$	24,742		$	28,663
Net change in non-contingent liability	(1,654		)	(2,868		)	851
Provision for contingent guarantee liability	(520		)	217			(4,772		)
Ending balance	$	19,917		$	22,091		$	24,742

Liability as a percentage of total guarantees	2.02		%	2.07		%	2.22		%

The following table details the scheduled maturities of our outstanding guarantees in each of the five fiscal years following May 31, 2015 and thereafter:



(Dollars in thousands)	Amount Maturing
2016	$	207,330
2017	35,198
2018	209,711
2019	18,087
2020	63,345
Thereafter	452,829
Total	$	986,500