1. Funding the future
Emerging strategies in cooperative
financing and capitalization

2. Contents
1 Executive summary
4 Background
6 The need for funds
Impact of the financial crisis
Shifting funding priorities
Intensifying regulatory pressure
Access to funding now a cooperative priority
Cooperative structure challenges continue
14 Sources of funds
A diverse array of financing options
Increased use of external funding sources
International diversification of debt
Consolidation as a capitalization strategy
Application of cooperative principles to improve access to funding
23 Successfully funding the future
30 Appendix
31 Key contacts
32 Endnotes
Funding the future: Evolving strategies in cooperative financing and capitalization
was commissioned for the 2012 International Summit of Cooperatives, held in
Quebec City from October 8-11. The study also demonstrates Deloitte’s commitment
to recognizing 2012 as the International Year of Cooperatives.

3. Executive summary
The post-2008 economic crisis has negatively impacted the ability
of all commercial organizations to achieve adequate funding. The
unique structure of cooperatives further complicates this reality, and
requires a customized approach to overcome financing challenges.
To understand whether cooperatives are facing the same issues
as the larger market; how their unique structure makes it easier
or more difficult to achieve adequate funding and what they can
learn from their peers, CFOs and senior executives from the world’s
largest cooperatives were asked how their organizations had
fared during the crisis, and how their financing and capitalization
strategies were evolving to respond to new market realities.
Funding the future 1

4. The survey provided clear evidence that The need for funds
financing and capitalization are becoming • The impact of the crisis is real: 65% of respondents
identified the global financial crisis as having a negative
increasingly important for cooperatives, and impact on access to financing and capital, and 92%
expressed concern about their ability to withstand another
demonstrated that the cooperative structure financial crisis.
places additional constraints on the types • Financing priorities are changing: Survey respondents
forecast a distinct shift towards inorganic growth (from 22%
of instruments and strategies that can be to 53%) and operational efficiency (from 17% to 43%) as
major drivers of funding needs.
employed. Despite this, the study found that
• Regulatory pressure is intensifying: 75% of financial
large cooperatives are gaining experience services respondents reported that Basel III/Solvency II will
have a major impact on their business model, and 58% cited
with external funding sources and innovative a high level of uncertainty around regulatory change.
funding instruments, and view these as • Access to funding is a priority: 68% of respondents
listed access to funding as one of the top three strategic
critical to achieving their strategic objectives. priorities facing their organizations today.
• Challenges related to the cooperative structure will
This report focuses on two major areas – continue: The top three challenges to the cooperative
funding model were identified as:
the need for funds and sources of funds i Significant dependence on surplus and earnings (65%)
ii Balancing the interests of an increasingly diverse
– with each providing data on participants’ stakeholder group (65%)
iii Limited ability to raise capital within the member base
responses to questions and placing the (59%)
information in a larger context.
2 Funding the future

5. Sources of funds Successfully funding the future
• A more diversified array of financing options To improve their access to capital, enhance risk management practices,
has emerged: 50% of respondents forecast using and increase stakeholder engagement, cooperatives are encouraged to:
non-traditional instruments to meet their financing and
capitalization needs. • Review capital needs to ensure that sufficient funding is being
raised in response to the evolving economic environment.
• There is increased use of external funding sources:
Only 35% of respondents are planning to use obligatory • Assess historical financing and capitalization strategies to determine
member shares as an equity lever compared to 50% today. their suitability for meeting future capitalization needs.
To compensate, cooperatives are expanding the use of other
types of equity instruments. 53% are planning to • Update funding plans to ensure that the right mix of debt and
issue equity instruments to external investors compared to equity; the right classes of equity; and the right mix of internal and
38% today. external investors are being pursued to satisfy capital needs and
manage risk.
• Debt is being diversified internationally: Funding
via international debt markets is forecast to grow from • Expand the range of financing tools to diversify sources of capital
24% to 53%. and accomplish capitalization plans.
• Consolidation is being employed as a capitalization • Educate members and investors on the implications of internal
strategy: More than one-third of all respondents expect versus external funding strategies, and help external investors better
to use mergers and acquisitions as a tool for meeting their understand and appreciate the unique elements of investing in a
funding needs. cooperative.
• Cooperative principles are being used to improve • Engage regulators to ensure that the unique structures of
access to funding: Recommitting to cooperative principles cooperatives are reflected in new legislation and regulations.
such as a longer-term strategic and operational focus,
member economic participation; and collaboration among • Strengthen governance processes by ensuring that the board
cooperatives were identified as value-added approaches to offers the required competencies, experiences and perspectives with
solving a cooperative’s capitalization needs. respect to cooperative strategy, risk profile and operations.
Funding the future 3

6. Background
The crisis of capital A significant amount of research has been conducted
One of the most significant casualties of the economic in recent years examining cooperative funding from
crisis that has gripped the world’s markets for the last a theoretical standpoint, with limited feedback from
five years has been ready access to sufficient capital and cooperatives themselves.
financing. Organizations of all sizes, all industries and all
geographies have been impacted. In a recent survey of • Are cooperatives facing the same financing and
North American CEOs, for example, nearly half mentioned capitalization challenges as the wider market?
either U.S. or global economic conditions as their most
concerning risk, particularly in the Eurozone. • How does the unique structure of a cooperative make
it easier or more difficult to achieve adequate
Capital scarcity is the result of reduced availability capitalization?
from conventional sources and increased need due
to a challenging business climate and new regulatory • How can cooperatives learn from their peers in order
requirements. Cooperative organizations have not been to optimize their strategies for securing capital?
immune to these issues, and face competition from
aggressive organizations with increasingly sophisticated Taking the cooperative pulse
social agendas. They must build scale and invest in their To answer these questions, Deloitte conducted a global
businesses to compete, but their unique structure requires cooperative financing and capitalization survey in the
a customized approach to meeting funding needs. summer of 2012, the first of its kind since the 2008 crisis.
CFOs or delegates from 36 cooperatives, including some
of the world’s largest, were asked how their organizations
had fared during the financial crisis, and how their
When facing the need financing and capitalization strategies are evolving to
respond to new market realities. Responses were received
for increased capital in a from four continents and four main industry sectors:
agriculture/forestry, banking, insurance and consumer/
competitive and uncertain retail.
economic environment, the Survey findings were supplemented with experience
gained serving clients in the cooperative and non-
cooperative business model has cooperative sectors; interviews of cooperative leaders
from around the world; and with complementary peer
emerged as both a strategic research. The findings are consolidated in a series of
recommendations for cooperatives to optimize their
advantage and a challenge. funding strategies.
4 Funding the future

7. What cooperatives told us
68%
listed access to funding as a priority today
87%
anticipate difficulty in accessing financing
and capital in the future
75%
report Basel III/Solvency II will have a
major impact on their business model
53%
forecast shift towards inorganic growth in
driving the need for capital
43%
forecast shift towards operational efficiency
in driving the need for capital
50%
expect to use non-traditional instruments
to meet their financing needs
63%
expect collaboration to be an important
funding strategy for the future
Funding the future 5

8. The need
for funds With over a billion members worldwide, cooperatives play an important role in
the global economy. Driven largely by the needs of their membership, they are
different from investor-owned corporations in many regards. However, cooperatives
increasingly compete with investor-owned corporations in terms of both operations
and access to sources of funding. The cooperative business model, while offering the
advantages of access to member financing and often impressive customer loyalty,
introduces a number of challenges in an uncertain, highly-regulated economic
environment. Cooperatives must be true to their mission as they seek to achieve the
greater financial flexibility needed to drive growth and compete successfully.
6 Funding the future

9. The global survey confirmed that the financial crisis has In the financial services sector, 27% also reported that
affected cooperative organizations around the world, the financial crisis had a significant negative impact on
and provides valuable insight into how regulatory and availability and access to capital. Only 8% of non-financial
competitive pressures are increasing the need for adequate services cooperatives felt this way, with many (58%) citing
funding while complicating its acquisition. “some” negative impact on the availability and access to
financing and capital.
The impact of the financial crisis
The 2008 economic crisis has had a profound impact Survey respondents indicated anxiety about their ability to
on cooperatives. As expected, the effect was most manage another financial crisis. The concern is especially
pronounced in the financial services (FS) sector, with 63% prevalent in the capital-intensive agriculture sector and
in this group reporting “significant or some” negative the financial markets-dependent banking and insurance
impact on business performance. In the non-financial sectors, where 100% of financial services cooperatives
sector (non-FS), although no cooperatives reported a indicated they are “somewhat to very” concerned.
significant negative impact, 57% did report that it had Similarly, 93% of agricultural cooperatives surveyed
“some” negative impact on their business performance. indicated this level of concern about their organization’s
ability to withstand a situation similar to 2008.
2008 Global financial crisis
Impact on business performance Impact on access to funding
Significant negative impact 27% 27%
8%
Some negative impact 36% 36%
57% 58%
No impact 28% 28%
43% 26%
Some positive impact
8%
Significant positive impact 9% 9%
Financial services Non-financial services
57%
report negative impact of the 2008 financial
66%
report negative impact of the 2008 financial
crisis on business performance crisis on access to funding
Funding the future 7

10. Shifting funding priorities External research and survey responses confirm that
The global financial crisis experience is impacting the growth presents unique challenges for cooperatives.
way cooperatives deploy funding. As with the broader Cooperatives often operate in mature industries with
economy, cooperatives reported that their pre-crisis funding defined geographies and specific mandates; many have
activities were conducted primarily to satisfy organic formal or informal restrictions on entering neighbouring
growth and infrastructure needs. Looking forward, there territories. A growth strategy can also be difficult to
is a distinct shift towards inorganic growth (from 22% to communicate and implement in the cooperative context,
53%) and operational efficiency (from 17% to 43%). particularly where the benefits to existing members are not
clear or where members perceive the strategy as diverting
Within the financial services sector, growth and efficiency resources available for distributions or reinvestment
are also important considerations, but these organizations in other priority activities. In certain circumstances,
forecast a greater need than the “all cooperatives” group democratic decision-making process may engender a
to respond to capital-related regulatory requirements and level of risk-aversion that makes a growth strategy less
external rating and market expectations. attractive.
Increased focus on inorganic growth Further complicating the pursuit of inorganic growth is
Among the cooperatives surveyed, organic growth and the fact that many cooperatives are structurally unable
inorganic growth are cited as the top factors driving to issue additional common equity,1 and must therefore
the need for funding. The cooperative sector focus on fund acquisitions and other expansion projects through
growth is consistent with the larger market; it is generally debt and/or liquid assets. The success of a cooperative in
accepted that creating and maintaining economies of managing this and other challenges will impact its growth
scale is of renewed importance to cost competitiveness. strategies.
As cooperatives compete with non-cooperatives in most
markets, they are consequently feeling pressured to
remain competitive by acquiring scale.
Key factors driving the need for capital
All cooperatives Financial services cooperatives
45% 40%
Organic growth
52% 40%
22% 10%
Inorganic growth
53% 40%
Investments in 32%
infrastructure 42% 30%
Investments in 17%
operational efficiency 43% 40%
Respond to capital-related 10% 10%
regulatory requirements 14% 30%
Respond to external rating/ 13% 20%
Market expectations 27% 50%
Pre-2008 Forecast
8 Funding the future

11. Investing to improve operational efficiency opportunities for increased efficiency in these networks.
Investing in technology and infrastructure to improve This need will likely escalate as mobile banking, contactless
efficiency and meet member and customer expectations payments and integrated cash management become table
has been identified as another important driver of the stakes, prompting credit unions to invest significantly if
increased need for funding. 66% of all cooperatives they are to remain competitive with the leading banks.2
surveyed rated investment in technology and 61% rated
investments in infrastructure as having a medium to high Intensifying regulatory pressure
degree of importance today. One of the most far-reaching responses to the global
financial crisis has been the move by multiple jurisdictions
While cooperatives and non-cooperatives both view to increase regulatory oversight of market activities,
investments in technology and infrastructure as critical particularly in the financial services sector.
to improving productivity, remaining competitive and
growing operating margins, the nature of cooperatives Many new regulations do not take into account the
can translate to additional pressure in this regard. Financial unique structure of cooperatives, creating additional and
cooperatives, for example, have historically maintained often unnecessary burdens on these organizations. At
extensive branch networks to support strong links to their best, these regulations fail to improve a cooperative’s risk
members and communities. In our survey, a European profile; at worst, they serve to limit its strategic flexibility.
financial services cooperative reported the need to explore
Drivers of capital needs
Organic growth Inorganic growth
29% 44%
Pre-2008 26% 34%
45% 22%
26% 25%
Current 22% 41%
52% 34%
16% 22%
Forecasted (next 3-5 years) 32% 25%
52% 53%
Low Medium High
Investment in technology Investment in infrastructure
50% 45%
Pre-2008 33% 23%
17% 32%
33% 39%
Current 33% 26%
33% 35%
33% 39%
Forecasted (next 3-5 years) 24% 19%
43% 42%
Low Medium High
Importance
Funding the future 9

12. Basel III and Solvency II features will impact external investor perception of their
75% of financial services cooperatives surveyed for capital strength and negatively impact the treatment of
the study are working towards Basel III (global capital these instruments for regulatory capital purposes. Adding
adequacy standards) and Solvency II (EU insurance to this concern is a lack of clarity on how cooperative-
regulation) compliance. In this subset, 75% identified specific accounting treatments will be managed under
the impact of these regulations on business model and IFRS. 70% of respondents indicated a “somewhat to
strategy as a key concern, with 58% citing uncertainty strong” need for additional guidance and clarification on
related to the application of the final regulatory the implementation and impact of IFRS.
frameworks to cooperatives. Cooperatives surveyed
indicated the need for additional guidance or a Access to funding now a cooperative priority
cooperative-specific set of regulations, with 55% saying Survey respondents confirmed that access to funding has
that it is “required or strongly required” and a further 18% become more complicated in the aftermath of the 2008
responded that it is “somewhat required.” global financial crisis. Consequently, survey respondents
reported an increased level of vigilance relating to
IFRS maintaining sufficient access to liquidity and capital. For
While the move to IFRS (International Financial Reporting many cooperatives, access to funding is expected to be an
Standards) potentially impacts all cooperatives, compliance increasingly high-priority issue, moving from 50% pre-crisis
is a particularly critical issue for the financial services to 68% today and 77% in the future.
sector. Among cooperatives surveyed for the study, 68%
are working towards IFRS compliance. Major concerns The financial services cooperatives surveyed are already
include increased volatility in results, and additional cost, placing greater importance on access to funding. While
effort and risk associated with models required to derive a slightly larger percentage of this group (56%) ranked
fair value information. Cooperatives are also concerned access to capital before the financial crisis as a high
that the classification of cooperative member shares as priority, 78% identify it as such in the current environment.
liabilities rather than equity due to their share redemption
Key concerns with Basel III/Solvency II regulations Key concerns with IFRS standards
Financial services cooperatives All cooperatives
Impact on business 8% 43%
Requirement for fair
model and strategy 17% 7%
value accounting
75% 50%
Level of uncertainty 8% 34%
Classification of cooperative
related to their application 33% 25%
member shares – as liabilities
to cooperatives 58% 41%
17% 52%
Accounting for
Liquidity risk framework 33% 21%
distributions/patronage
50% 27%
Investments required 25% Complexity of defined benefit 58%
in information systems 25% pension plan accounting 15%
50% 27%
Meeting leverage ratios, 25% 84%
liquidity ratios and capital levels 25% Accounting for mergers 8%
50% 8%
Low Medium High Low Medium High
10 Funding the future

13. Not only is accumulation of funding a high priority for in the last quarter of 2011. Since then, Moody’s decision
cooperatives, it is a difficult process, made so by the general to put 114 European banks and eight non-European banks
issues of economic uncertainty and increased regulations as on negative watch in 2012 is expected to affect interbank
well as the restrictions imposed by the cooperative model lending, and eventually increase the cost of funding for
on the issuance of equity. Of all cooperatives surveyed, 87% borrowers.3 This decision will also constrain the availability
expect that accessing sources of capital other than retained of funding for a number of organizations as banks become
earnings will become “somewhat to very difficult.” This is increasingly selective about the recipients of their financing.
significantly higher than the 45% calling it “somewhat to
very difficult” pre-crisis, and the 68% citing it as such today. It is therefore not surprising that cooperatives today are
especially concerned about their ability to meet liquidity
Liquidity concerns affect lending decisions needs. 26% noted that before the 2008 crisis, it was
Since the global financial crisis, fluctuations in global “somewhat to very difficult” to meet liquidity needs.
liquidity have had a major impact on financial stability and Today, 32% of cooperatives feel this way, and 74% expect
economic growth. As the sovereign debt crisis spreads from to experience difficulty in the future.
Portugal, Italy, Ireland, Greece and Spain to core Eurozone
countries, the possibility of a second credit crunch continues
to temper equity markets and impact market liquidity and
credit spreads. European banks’ risk aversion in such an
environment, coupled with increased capital requirements
owing to Basel III reforms, created tight liquidity conditions
Access to capital as a priority Difficulty in accessing capital
All cooperatives Financial services cooperatives All cooperatives
Not a priority/ 27% 33% 55%
6% 11% Not difficult 32%
Low
3% 13%
23% 11% Somewhat difficult/ 35%
Neutral 26% 11% 58%
Difficult
20% 22% 74%
Top 3/High 50% 56% Very difficult/ 10%
68% 78% 10%
priority Top 3 challenges
77% 78% 13%
Pre-2008 Current Forecast
Funding the future 11

14. Cooperative structure challenges continue Balancing funding requirements with stakeholder
Opinion was divided on how the cooperative business interests
model impacts its ability to raise capital. Although almost 73% of the survey’s non-financial services respondents
half (48%) of all respondents felt that a cooperative’s agreed that balancing a cooperative’s financing and
capital structure and restrictions are not a competitive capitalization requirements with interests of various
disadvantage, 59% felt they had limited ability to raise stakeholders is a challenge. One of the cooperatives
funds within their membership base. interviewed mentioned that achieving alignment between
management and members on strategic priorities can
As cooperatives are often funded primarily through be an issue, especially as it relates to inorganic growth.
obligatory member capital (on which members do Members may see expansion as a risky endeavour
not expect a rate of return), and debt (where interest and hesitate to support related investments, while
payments can be tax deductible), they typically enjoy a management could view growth as a necessary response
lower cost of capital. Not surprisingly, only 30% of all to a competitive marketplace.
respondents felt they had an intrinsically higher cost of
funds than their non-cooperative competitors. Although the overlap between the constituencies in a
cooperative – with members being owners, but also
Ownership structure limits access to equity clients, suppliers and employees – could serve to simplify
The ownership structure of a cooperative results in limited decision-making when interests align, it can complicate
sources of traditional equity capital. Cooperatives do not issues when they do not. The balancing act becomes
typically issue common equity shares to external investors, as further complicated when external investors with differing
ownership and control must reside within the membership investment objectives are introduced to the mix.
base. As a result, cooperatives have historically relied
significantly on retained earnings to fund growth, which limits Robust governance required
the rate of capital accumulation and the ability to grow.4 The decision to pursue innovative financing options
requires added oversight and risk management
Although 62% of respondents in the non-financial services capabilities. However, external research on the topic
sector felt they had limited ability to raise capital within concludes that cooperatives vary widely in the robustness
the member base, ranking it the top challenge, financial of their governance structures. While the one member/one
services cooperatives did not identify this particular factor vote principle enabled cooperatives to better withstand
as a challenge. Differing perceptions may be due to the the financial crisis through risk aversion, consideration
global financial crisis, but could also be structural – a large should be taken to prevent an overly conservative and/or
agri-foods respondent indicated that the preference of insufficiently rigorous approach to risk management.5, 6
agricultural cooperative members is to limit investment in
the cooperative to their trade commitment.
Top 3 challenges linked to cooperative capital structure
Non-financial services Financial services cooperatives
33% 17%
Significant dependence
Limited ability to raise capital
5% is placed on internally 16%
within the members base
generated equity
62% 67%
45% Accounting standards and/or 33%
Significant dependence
regulatory capital requirements
is placed on internally 10% 17%
are putting cooperatives at a
generated equity
45% competitive disadvantage 50%
27% Cooperative capital 33%
Need to balance interests structure characteristics and
37% 33%
of various stakeholders restricitions are a source of
36% competivie disadvantage 33%
Low Medium High Low Medium High
12 Funding the future

15. Top 10 shifts in attitude pre-crisis versus forecast
The table below presents the “Top 10” issues where the cooperative perspective, as provided by
survey responses, has shifted most significantly before and after the global financial crisis (GFC).
Change from
Topic pre-crisis to forecast Details
26% of the cooperatives noted that it was “somewhat
Meeting liquidity needs + 48% 4 difficult” to meet their liquidity needs pre-GFC. This number
shot up to 74% for the future.
Only 35% of the cooperatives felt it was “somewhat
Difficulty accessing
sources of capital + 39% 4 difficult” to access sources of capital pre-GFC, while 74%
expect this to be “somewhat difficult” in the future.
Organizations placing high importance on inorganic growth
Inorganic growth + 31% 4 grew from 22% pre-GFC to 53% in the future.
Prioritization of The prioritization of access to capital as “high” increased
access to capital + 27% 4 from 50% pre-GFC to 77% for the future.
Importance of investing in operational efficiency grew from
Operational efficiency + 26% 4 17% pre-GFC to 43% in the future.
The perceived importance of developing new financing
New financing markets + 30% 4 markets grew from 23% pre-GFC to 53% in the future.
Employment of international debt markets grew from
International debt markets + 30% 4 23% pre-GFC, to 53% in the future.
“High” support for issuing new types of financing and
New types of financing &
capitalization instruments + 24% 4 capitalization instruments grew from 26% pre-GFC to
50% in the future.
External, non-member Perceived importance of issuing equity to external,
investors + 20% 4 non-member investors grew from 20% to 40%.
Support for collaboration with other organizations
Collaboration with
other organizations + 16% 4 (including cooperatives and non-cooperatives) grew from
47% to 63%.
Although the overlap between the constituencies in a cooperative
– with members being owners, but also clients, suppliers and
employees – could serve to simplify decision-making when interests
align, it can complicate issues when they do not. The balancing act
becomes further complicated when external investors with differing
investment objectives are introduced to the mix.
Funding the future 13

16. Sources
of funds As cooperative organizations seek to satisfy their increased need for capital,
they are exploring a variety of new options. This section highlights some of the
advantages of the cooperative model as it relates to financing and capitalization;
outlines conventional and emerging options available to cooperatives; and
presents examples of how cooperatives are finding innovative solutions to their
funding needs.
14 Funding the future

17. A diverse array of financing options New funding options
Organizations generally have four options for financing Merger with another
19%
new growth and operational investments: operating organization (cooperative
or non-cooperative) 38%
capital (e.g. retained earnings); debt (e.g. bank loans,
issuance of debt instruments, securitization); equity; Equity issuance to external, 20%
non-member investor 40%
and hybrid debt/equity instruments (e.g. convertible
Issuance of new types
bond offerings). Cooperatives have historically focused of financing and 26%
capitalization instruments 50%
on funds from operations and debt or equity from their
member base. However, as the survey responses indicate, Development of new
23%
financing markets
cooperatives are now looking beyond traditional financing 53%
(e.g. internationally)
approaches to improve their capital positions and enable 47%
Use of cross-guarantees
growth. 56%
Collaboration with 47%
Many are identifying new financing markets and issuing other organizations 63%
new types of financing instruments. They are evaluating
Debt issuance to external, 55%
the issuance of equity to external, non-member investors, non-member investors 74%
and collaborating with other organizations – both
cooperative and non-cooperative – at higher rates. Pre-2008 Forecast
Rather than relying solely on bank debt, the percentage
of cooperatives seeking to issue debt to external, non-
member investors jumped from 55% pre-crisis to a
forecast level of 74%.
Expanded equity options Comparison: Utilization of top equity levers
Many cooperatives depend on retained earnings as the
88%
primary source of equity financing. Obligatory member Retained earnings 91%
shares are another key source, particularly when the 94%
minimum investment is greater than a nominal amount. Member financed: 53%
However, survey respondents indicated that obligatory Issuance of obligatory 50%
cooperative member shares 35%
member shares, historically the most common source of
capital after retained earnings, will decline in significance. Member financed: 35%
Issuance of non-obligatory 35%
Only 35% expect to use these as a top equity lever membership capital 45%
compared to 53% before the crisis. Cooperatives
48%
decreasing their reliance on obligatory membership capital External investors: Issuance
38%
of equity instruments
are expanding the use of non-obligatory member capital 53%
and capital from external investors.
Historical Current Forecast
Funding the future 15

18. Cooperative equity and debt instrument options (non-exhaustive)
The table below identifies potential cooperative debt and equity instruments for quick reference.
Instrument name Description
• Acquired by members as condition of membership
Conventional (obligatory) • Issued and redeemed at nominal value
cooperative membership • Typically adheres to one member-one vote principal
shares • Earns return in the form of patronage and other dividends
• Generally considered Tier 1 capital as long as redeemable under limited circumstances
• Issued exclusively to members
• Redeemed at nominal or market value
Preferred shares and
• Typically non-voting
certificates – members
• Earn priority interest
• Perpetual, non-cumulative type generally categorized as Tier 1
• Acquired by third-party investors that are not members
of the cooperative and may not use its services
Preferred shares – non- • Redeemed at nominal or market value
members • Could include voting rights
• Priority right to earnings
• Perpetual, non-cumulative type generally categorized as Tier 1
• Transfer of assets to an investor-owned firm in exchange for stock
• Listing of minority portion of cooperative shares or shares of some entities on a regulated
Tradable cooperative market
shares and investment • Traded at market value
certificates • Could be voting or non-voting
• Earn return through dividends
• Generally constitutes Tier 1 capital
• Could be issued to members and non-members
• Redeemed at nominal or market value
Senior debt issuance
• Non-voting, unless hybrid
• Earn return through interest which could be floating or fixed
• Loans (or securities) that rank below other loans (or securities) with regards to claims on
assets or earnings
Subordinated debt
• Typically issued to outside investors by large organizations
issuance
• Non-voting
• Fixed or floating interest rate
• Debt instruments secured by a pool of assets, such as mortgages or loans, held by special
Covered bonds (FS) purpose vehicle (SPV) that guarantees repayment of the covered bonds in case of default
by the issuer
• Process through which an issuer creates a financial instrument by pooling other financial
Securitization (FS) assets (e.g. mortgages) and then markets different tiers of cash flows relating to the
repackaged instruments to investors
16 Funding the future

19. % of respondents
Currently issuing Forecast Remarks
50% 20% 43% • Primary motive of the acquirer is to conduct business
FS and non-FS FS non-FS with the cooperative rather than get financial returns
• Enable cooperatives to raise discretionary equity
70% 19% 40% 48%
• Could be issued directly by the cooperative or by a
FS non-FS FS non-FS
separate legal entity
40% 36% 60% 50% • Enables the cooperative to bolster its equity position
FS non-FS FS non-FS
80% 60% 89% 70%
FS non-FS FS non-FS
50% 34% • Could help with bank’s liquidity position but does not
FS up from 17% pre GFC FS reduce leverage ratios
• Drop in usage mainly due to significant contraction in
33% 33% securitization markets following the global financial crisis
FS down from 50% pre-GFC FS rather than the cooperatives choosing not to access this
market
Funding the future 17

20. Outlined below are some examples of how cooperatives Issuance of preferred shares/certificates
have diversified their funding sources by using non- to members
traditional types of financing instruments. Member certificates are non-obligatory instruments
that allow members to increase their investment in the
Issuance of conventional cooperative cooperative. The certificates can have a fixed maturity date
membership shares or can be perpetual in nature. They earn a set percent
Membership equity shares, typically issued to establish annual dividend that is discretionary, but must be paid
the ownership interest of members, are usually one of the before surplus payments to members. Certificates can be
cheapest sources of financing as members do not expect a cumulative, meaning that if the dividend is not declared
market rate of return. Membership equity shares generally one year, it will accumulate with the following year’s
enforce a one member/one vote ownership structure. In dividend, or they can be non-cumulative.
some jurisdictions, legislation allows cooperatives, when
required, to make mandatory assessments for long-term Issuance of preferred shares/certificates
membership shares that do not give additional voting to non-members
rights but pay small dividends.7 As noted above, surveyed Similar to certificates issued to members, those issued to
cooperatives are decreasing their reliance on obligatory non-members are uninsured, perpetual, non-cumulative
cooperative member shares and increasing the use of and carry no voting rights. Rabobank issues hybrid capital
other types of equity levers. (similar to certificates) via a trust to outside, non-member
investors in exchange for a defined rate of return based
Membership equity shares in a financial services on prevailing government bond rates. Investors in this
cooperative have been generally considered Tier 1 capital type of instrument do not have the right to convert their
for Basel requirements as long as they are redeemable securities to ownership shares in Rabobank, and hold no
under limited circumstances, and the redemption does voting rights. Another example is CHS, a leading U.S.
not reduce capital below a fixed level. Redemption of cooperative owned by farmers, ranchers and other coops.
membership equity shares usually requires board approval. Since 2003, CHS has issued non-voting preferred shares
to outside investors that can be traded on NASDAQ. The
Another closely aligned category is patronage equity shares entitle the owner to receive an 8% dividend on the
shares. These are investment shares issued in lieu of par value of the shares.9
patronage dividends, and are themselves eligible for
dividends. The individual caisses (credit unions) of For smaller cooperatives, an investment pool is a useful
Canada’s Desjardins Group give their members the approach. As part of an experiment in 2006, twenty-one
option to receive surplus dividends as membership Australian credit unions created a purpose-built entity to
certificates instead of cash. The membership certificates issue preferred shares to institutional investors and offered
are non-voting, but give the holder the right to an returns based on a spread over BBSW (Australian financial
interest rate voted on by the members and conditional markets reference rate). The credit unions provided the
on the caisse generating a surplus. Another example is a entity with a loan reserve equal to 10% of the aggregate
North American dairy cooperative that grew to over face value of the issuance. Given that the credit unions
$3B in revenues relying significantly on member capital; had no history in this type of instrument and therefore no
its current capital structure includes over $500M in track record of payment, the reserve provided additional
investment shares.8 The cooperative’s patronage shares comfort to the market with respect to the preferred
are eligible for dividends and can be transferred among shares.10
members.
18 Funding the future

21. Issuance of tradable cooperative shares and respondent noted that they established a secondary
investment certificates market to enable trading of membership certificates,
Tradable cooperative shares and investment certificates which were required to be non-redeemable in order
require the cooperative to transfer all assets to an investor- to qualify as Tier 1 capital. To allow holders of these
owned firm in exchange for stock. A minority portion certificates to opt out and to eliminate the need for a
of the stock is then sold on the stock exchange to raise liquidity premium, the cooperative trades membership
capital directly from outside investors. Cooperatives retain certificates quarterly at a market value derived from bids
control of the organization by holding the majority of and offers received through the quarter.
outstanding stock while accessing outside capital. As an
example, Crédit Agricole S.A, listed on the Euronext Setting up a secondary market requires a significant effort
(Paris) was created to represent all of the Group’s business and ongoing administration. Cooperatives must determine
lines and components. As of December 2011, 56.2% of eligible instruments (e.g. membership shares, preferred
Crédit Agricole S.A was owned by the regional banks that shares or common shares); establish a system to process
make up the Federation of Crédit Agricole, and 38.7% orders; decide on the frequency; set up a clearing house
was owned by institutional and individual investors.11 to match buyers and sellers and update records (often
Danish Crown, a Danish food processing company and outsourced); and determine the share valuation.
Europe’s largest pork producer, voted in October 2010 to
form a limited company wholly owned by the cooperative
for the purpose of opening up external investor financing
options over the long term.12
Deployment of secondary markets to enable
trading of cooperative instruments
35%
Secondary markets, such as a regulated stock exchange,
allow investors to purchase cooperative securities from
other investors rather than directly from the issuing
company. Secondary markets enable the trading of expect to rely on obligatory cooperative
cooperative capital, thus providing liquidity to members
and investors. A secondary market for cooperative capital member share, declining from 53% pre-crisis
instruments such as preferred shares/member certificates
would make these instruments more attractive to both
members and external investors. While only 9% of non-
financial services respondents provide secondary markets
74%
for their investors, 25% of financial services firms currently
do so. This is partly driven by regulatory requirements
for Tier 1 capital. One European financial services
Forecast to issue debt to external non-member
investors, a jump from 55% pre-crisis
Funding the future 19

22. Expanded use of debt instruments Issuance of subordinated debt to non-members
Credit lines and loan facilities are expected to remain Subordinated debt is typically issued to outside investors
the top debt lever used by the cooperative sector. with a defined long-term maturity. It is non-voting with
Among cooperatives surveyed, 94% currently use a fixed or floating interest rate. In most cases, only large
these instruments, and 91% expect to use them in the organizations are able to generate sufficient scale to issue
upcoming three to five years. However, over-reliance on stand-alone subordinated debt. However, similar to trust
bank loans can be problematic in light of regulations such preferred shares, an investment pool approach can be
as Dodd Frank and Basel III. These regulations decrease used for smaller organizations.
leverage ratios and increase reserve requirements for
banks, reducing the amount of capital that they are Of the cooperatives surveyed, 74% are expecting to
willing to put at risk and increasing the cost of debt for issue debt to external, non-member investors. This is
borrowers. This de-leveraging threatens to decrease the especially true in the agricultural sector and in North
availability of loans for non-cooperatives and cooperatives America. The benefits of issuing long-term debt include
alike, and further bolsters the case for increased debt longer maturities than bank loans, which increases
diversification.13 Surveyed cooperatives are considering flexibility for CFOs, and an opportunity to diversify the
issuing more non-loan debt and hybrid instruments in the investor base. For example, Canada’s Desjardin Group
future – 75% and 22% respectively compared to 67% and issued a significant amount of subordinate debentures
14% today. on the American capital markets via Capital Desjardins,14
a wholly-owned purpose-built subsidiary. The proceeds
were then invested in subordinated notes issued by
Utilization of top debt levers (historic vs forecast) Desjardin’s member caisses, effectively allowing them to
81% raise financing when needed. Rather than going through
Short-term
borrowing 84% the process individually, the member caisses deal with
70%
Desjardins Capital which issues on a consolidated basis.
94% Desjardins Capital’s short form base prospectus allows
Credit lines
and loan facilities 94% it to issue senior notes and Class C preferred shares.15
91%
Similarly, some of the agricultural cooperatives in
73% France that previously relied solely on bank debt have
Debt issuance 67% started accessing bond markets, and many are analyzing
75%
this option.
10%
Other hybrid
14% Expanded use of cross guarantees
instruments
22%
Cooperatives are projected to increase the deployment
of legally-binding cross guarantees to connect different
Historical Current Forecast
entities of the group as a risk management tool. In a cross
guarantee arrangement, individual entities are liable for
each other’s obligations. Rating agencies tend to view
Issuance of senior debt to members this type of arrangement as less risky since the entire
Senior debt issued to members typically has a defined organization is viewed as a single consolidated risk unit.
long-term maturity and a fixed or a floating interest Liquidity management is performed by a central function
rate. Rabobank has successfully issued senior debt to its for the collective. Survey respondents forecast an increase
members who value both the attractive rate of return and in cross guarantee arrangements from 47% pre-crisis to
the opportunity to contribute to the financing of their 56% in the future.
cooperative.
20 Funding the future

23. Increased use of external funding sources
An underlying theme of the move to more innovative Making the cooperative attractive to member
financing instruments is the employment of external and non-member investors
funding sources. This trend is expected to continue as As cooperatives move away from obligatory
cooperatives grow in size and the complexity of their membership capital towards non-obligatory sources,
capital needs increase. Cooperatives who embrace this they must strive to make the cooperative an attractive
strategy must also ensure that their debt and equity investment for member and non-member investors.
issuances are presented in a market-friendly manner – As an executive of a European food cooperative
particularly to investors unfamiliar with the cooperative noted, the usual debate within the cooperative
model – or they risk creating tension between internal and sector is whether external investors should be
external stakeholders with different strategic priorities. allowed to invest in a cooperative, but another
important question is whether investors would want
International diversification of debt to invest. This respondent’s cooperative has actively
There is a clear trend towards cooperatives crossing engaged external investors by building a track record
national borders in search of capital. Large cooperatives of performance and investing in branding and
in particular are becoming comfortable issuing debt in technology to stay competitive with non-cooperatives.
foreign-denominated currencies. While this may reflect the
emergence of multinational cooperatives and customers, Engaging with investors and rating agencies
international debt issuance is increasingly being used to Building relationships with investors and lenders will
support funding strategies such as currency hedging, support a cooperative’s ability to access financing
diversification of the investor base, interest rate exposure at competitive rates. The relationship with rating
and access to lending markets. Prior to 2008, only agencies is especially important for cooperatives
23% of respondents reported accessing international primarily financing themselves through debt, or for
debt markets. That number is forecast to be 53% of all those seeking to issue debt in the future. Keeping
surveyed cooperatives and 65% of those in the non- investors and rating agencies educated and updated
financial services sector. through regular communication and discussions in
the form of meetings, presentations, roadshows and
results calls can enhance this relationship.
Use of international debt markets
All cooperatives Non-financial services cooperatives
77% 85%
Never 76% 74%
47% 35%
10% 10%
Rarely/Occasionally 17% 26%
23% 35%
13% 5%
Fairly often/Frequently 7% 0%
30% 30%
Pre-2008 crisis Current Forecast
Funding the future 21

24. Consolidation as a capitalization strategy exhibit or emphasize a stronger sense of purpose and
Consolidation is not a new concept for the cooperative a firmer focus on their longer-term strategy than non-
sector. Scale is a strategic imperative for many industries, cooperative businesses. This can prevent over-reacting to
and inorganic growth can be an effective tool. As an short-term issues and opportunities. For example, while
example, the number of credit unions in Canada dropped European cooperative banks have a 21% market share,
from 3,700 to 370 between 1966 and 2012, while they only accounted for 7% of all the European banking
at the same time, the percentage of Canadians who industry’s write-downs and losses between the third
were members of a cooperative more than doubled. As quarter of 2007 and the first quarter of 2011.18
economies of scale can improve access to funding and
lower the cost of funds, financing and capitalization The longer-term focus may translate to less volatile
pressures are projected to accelerate the consolidation earnings and greater risk aversion, as member-owners
process. generally rank quality of service over return on investment.
While not specifically asked in the survey, multiple studies
As noted previously, inorganic growth was cited by survey have found that the risk-averse nature of cooperatives was
respondents as a major driver of capital requirements. a factor in their ability to better withstand the 2008 global
While some level of consolidation will be achieved through financial crisis.19, 20 However, as discussed earlier, a focus
the purchase of non-cooperative entities, unleveraged on risk aversion can be more successful when balanced
mergers of cooperatives is a more obvious method of with exploration of innovative funding strategies.
strengthening a balance sheet and building a platform for
growth. The ongoing merger of cooperative banks in the Member economic participation
Philippines into a single viable entity is one example of Member economic participation is one of the defining
how capitalization needs are driving consolidation in the features of cooperative societies. Members have the
cooperative sector.16 responsibility to contribute equitably to their cooperative,
and to exercise democratic control. Members often receive
Application of cooperative principles to limited compensation on capital subscribed as a condition
improve access to funding of membership. However, by exploring innovative
Adherence to cooperative principles among the instruments such as non-obligatory member equity,
cooperatives surveyed remains strong. The huge range in cooperatives are providing opportunities for members to
operating models, industries and geographies make broad strengthen their cooperatives while offering a market rate
generalizations difficult, but elements of the cooperative of return. These strategies can revitalize the membership
model can be seen as assisting an organization’s funding base as an enabler of growth and stability.
efforts. Survey respondents confirmed the importance of
the International Cooperative Alliance’s (ICA) cooperative Cooperation among cooperatives
principles17 to their organizations, with 69% reporting that The principle of “cooperation among cooperatives”
adherence was formally tracked and only 6% reporting can be an important financing tool. For example, cross
that these principles were not considered. guarantees between vertically-aligned cooperatives can be
used to reduce trade finance capital requirements and free
Long-term strategic and operational focus up capital for other uses. Pooling of assets and liquidity
Cooperative management is expected to act as an programs via structures such as credit union centrals
intergenerational steward of a healthy business, and is another example of how cooperatives are working
prioritize the long-term viability of the organization over together to manage their capital requirements.
short-term market/investor pressures. Cooperatives often
22 Funding the future

25. Successfully
funding the future
As the 2008 financial crisis and aftershocks including the Eurozone debt crisis
continue to disrupt global markets, cooperatives around the world are being forced
to re-work their approaches to financing and capitalization. This study has reviewed
the factors behind the increased need for capital, and explored the innovative ways
that leading cooperatives are addressing the problem.
Funding the future 23

26. How can cooperatives use this 1 Review capital needs
information to enhance their
organization’s financing and Survey respondents clearly indicated that their capital
needs are increasing due to greater competition,
capitalization capabilities? regulatory pressures and complexity of operations.
To reduce the risk of inadequate capitalization, it is
Evidence suggests they should examine important that these new conditions be considered in an
organization’s capitalization plans. Cooperatives should
their current strategies and methods, ask themselves:
and identify opportunities to integrate • Do we have the liquidity necessary to meet our
normal operational and financial commitments? What
innovative approaches. contingencies have we built into our plan?
• Are we considering inorganic as well as organic
growth?
Provided below are series of questions
• If inorganic growth is being considered, do we have
cooperatives should ask about their sufficient capital to fund the purchase, or will it be
a non-cash merger?
current capitalization strategies. The
• How will the funding of future acquisitions affect our
questions have been grouped into credit rating and access to capital in the future?
a seven-step review process, which • Will our planned investments in operational
efficiency be sufficient to maintain our competitive
progresses from high-level strategy to position?
tactical implementation. Many also • Have we adequately projected the capital impact of
proposed regulatory changes?
apply to non-cooperatives, but in
• Have we adequately planned for both short-term and
aggregate the questions are customized long-term capital needs?
for the unique needs of cooperative
organizations.
24 Funding the future

27. 2 Assess historical financing 3 Update funding plans
and capitalization approach
A solid understanding of historical capitalization With an understanding of your historical capitalization
approaches is an important step in the strategy process, approaches and projected capital needs, cooperatives
particular to identify why a particular mix of debit/hybrid/ need to review their funding plans and assess their
equity and internal/external funding approaches has been suitability for meeting future capital needs. Cooperatives
used in the past. Given that the range of instruments should ask:
also varies by the complexity of each cooperative, it
is important to understand the track record of these • Do we understand the key performance metrics and
approaches. Cooperatives need to look into their recent disclosures of relevance to our internal and external
past and consider: investors?
• How difficult has it been for us to access sufficient • Do we know how we compare to other coops and
capital? Has the perception of lenders, investors and non-coops in our industry?
rating agencies changed?
• Do we have access to adequate stable financing
• What are the key factors affecting our credit rating? based on our capital plan?
• Do we have any important credit facilities coming to • Do we have the right mix of retained earnings, debt,
term? What impact would renegotiation have on equity, and hybrid instruments?
availability of capital? On cost of capital?
• How must this investment mix change to match our
• Are sources of capital diversified enough to allow for capital needs?
changes in financing conditions?
• Do we have the right classes of financing and
• Is our cost of capital competitive with our peers, capitalization to meet our regulatory needs?
given our risk and operating profile?
• Are we overly dependent on internal or external
investors for our capital needs?
• How well positioned are we to withstand another
financial crisis? Do we have sufficient liquidity and
contingency provisions?
• Does our membership understand and support the
financing and capitalization strategy?
Funding the future 25

28. 4 Expand the range 5 Educate members, investors
of financing tools and rating agencies
When choosing the method of raising capital, cooperatives While all commercial ventures require the support of
can no longer expect to rely on what has worked in their investors, it is particularly important in the case of
the past. They should consider various alternatives to cooperatives. A strategy that embraces obligatory and
generate opportunities, lower cost of funds and mitigate non-obligatory member capital, for example, relies on
operational risk including: explicit member support for success. In many cases, this
will involve convincing members to accept a wider strategy
• Non-traditional debt instruments than the one they originally endorsed. External investors,
- Senior debt to members and non-member investors in contrast, require a certain amount of hand-holding to
- Subordinate debt to members and non-member be educated on the unique structure of cooperatives and
investors appreciate their value. To review the success of current
engagement strategies, cooperatives should consider the
• Non-traditional equity instruments following questions:
- Preferred shares/certificates to members and
non-members • Do our members understand the implications of
- Tradable cooperative shares and investment internal versus external funding?
certificates
• Do our members understand that retained earnings
• Exploring new financing sources (e.g. external may be insufficient to meet capital needs?
investors)
• Do external investors understand what makes our
• Issuing debt in foreign geographies/currencies organization different/unique?
• Establishing purpose-built entities to enable external • What is our investor reporting strategy (annual
fundraising reports, quarterly reports, relevant metrics, etc)?
• Formal and informal collaboration with other • What is our engagement strategy for rating
organizations (e.g. joint ventures, cross guarantees, agencies?
supply chain financing)
• Mergers with other cooperative organizations
• Acquisition of non-cooperatives
26 Funding the future