Please read the disclaimer before perusing the following article.
(written 1992, published Beef in B.C. Jan/Feb 93)
In a previous article, I wrote about how to keep out of trouble with a lender. This article includes some thoughts about what to do if keeping out of trouble is no longer an option.
“Breaking Smith’s Quarter Horse”, by Paul St. Pierre, is a favorite novel. If anyone in the cattle business has missed it, find a copy now and start reading.
The book reports a flow of correspondence between Smith and his banker. On June 1, the new manager of Smith’s bank wrote to him to demand that Smith come immediately to Williams Lake to discuss settlement of his account, on which all cheques had been stopped. “I cannot stress too strongly the seriousness and urgency of this matter”, said the banker.
Smith wrote reassuringly back on July 20th: “You are not any more worried about that account than I am and something has got to be arranged right away. I will be in with the beef drive in a couple of months and you will be the first man I look up when I hit town.”
This worked for Smith. Avoidance is not often such a successful technique.
It is important to have a level of comfort with the individual loans officer with whom you started out on the project now in trouble. That person may be able to help keep a lid on the situation as other people within the lending institution become involved with your situation.
Over the course of time, it is likely that the people that you deal with in the lending institution will change. Get any commitments IN WRITING and keep copies of everything you sign. It is just good business to do so.
When things start to go bad, despite the possibility that your lender may be unhappy about the situation, you are better off to maintain communications than not. First of all, your reporting requirements mean that you have an obligation to keep in touch. Also, would you rather deal with a nervous and unhappy lender? Or just unhappy? Not hearing from people when they suspect there is a problem makes lenders anxious and jumpy. If the lender knows what is happening, he feels he has a handle on the situation, is more secure and you are more likely to get some time or some help instead of a big unpleasant expensive surprise (collection action).
In a deteriorating situation, you must make an early assessment of your position. Sit down and figure out what you owe, when it comes due, who owes the money—you personally or your company—who guaranteed the loan, and what assets do the borrower and the guarantors have. You must decide if there is a realistic way to get through the financial problem, or if financial failure is inevitable. You must be realistic and you must make sound budget projections.
In your calculations, assess the value of assets if they are sold in an orderly manner, or in an immediate distress sale. What is the value of your operation if it is sold as an ongoing business after a year or two exposure to the market? What is the value if the lender forces an immediate sale?
The objective in making these calculations is to figure out if there is any possible way to make the operation succeed, and if not, what would your position be if you shut it down. If you cannot see a light at the end of the tunnel, you should meet with your professional advisors to decide on a course of action, which may include negotiation with your lender.
An early assessment of your position is absolutely essential because it may prevent you from using all your spare assets and draining your family and friends in a losing cause. Making an accurate early assessment, and accepting the reality of the situation, can stop you from throwing good money after bad.
Giving additional security to a lender where things are not going well, deserves the most careful consideration. If the lender will grant an accommodation but wants security over assets not originally pledged, you must think very carefully before agreeing. You should only agree if you have made your assessment and convinced yourself and your professional advisors that, with the accommodation, your enterprise is viable. If not, try and identify the consequences of not granting the security and make a plan to deal with the anticipated consequences, and refuse to grant the security.
If you are in trouble, do not sign documents at the bank. Ensure that you understand, and preferably get legal advice, on any documents that you sign.
Obviously if all your assets are secured to the lender and even if there were a forced sale, the assets are larger than the debts, you’ll have to keep soldiering on or devise a recovery plan which does not include much in the way of help from the lender.
The lender may be willing to help with a cash flow problem by rescheduling the loan payments, capitalizing interest, accepting interest payments only, and so on. The lender will want to look closely at your farm management and may have a number of suggestions or requirements for change, in return for extensions and like help.
On the other hand, if your conclusion is that your operation will fail and that you have no option to shut down, and if you do shut down your assets are less than your debts, you may be able to negotiate an arrangement with your lender. There is no set pattern. Each situation will rest on its particular facts. If the lender has confidence in your ability to perform a commitment, this is usually a major step towards obtaining an accommodation.
In some rare circumstances, a lender may negotiate a writedown, deferral or set-aside of your loan—reducing the loan to an amount that your business can realistically pay off. More commonly if you can arrange other financing for the current distress value of the assets (what the lender would get from your assets if they were sold immediately) the lender may agree not to collect the balance of your loan.
These possibilities can only be obtained by agreement with the lender. The lender can choose to exercise its legal remedies. Your task is to show that there is a more advantageous way to recover the same amount of money.
Lenders have gained an appreciation of the costs of putting in an outside receiver. It is common for a lender to allow a farm owner to continue operating the farm while it is offered for sale as a going concern. This is another avenue to maximize the value obtained on a farm sale. However an owner who participates in this plan should get something out of it apart from a smaller shortfall on the eventual sale—release of guarantees, salary during the period prior to sale—something to compensate him for this cooperation.
The Farm Debt Review Board is a federal board which offers confidential farmer-lender mediation services. Only the farmer can apply. Although lenders do not have to come to the table and negotiate, as a matter of policy all lenders have participated in FDRB negotiations except in the rarest situations. Certain types of FDRB applications result in a stay of proceedings, i.e. the lender cannot continue collection proceedings for a set period of time.
The issue of environmental questionnaires has the potential to be entwined with financial difficulties, so I include it in this article.
Many lenders are becoming concerned about their potential liability should they take over secured property with an environmental problem. The costs of clean-up can vastly exceed both the loan amount and the value of the secured property, and lenders can become liable if they take over the secured property.
Lenders are sending out questionnaires to loan clients so as to figure out what sort of environmental risk exists in the lender’ loan portfolios. The questionnaires include past land us (for past 25 years), present land use and on site processes, adjacent properties, and so on.
Be cautious. Before completing and returning the questionnaire to the lender, you should know the environmental requirements for the type of operation you have. If you have not had control of the operation for the last 25 years, you may wish to consider an environmental audit—although be aware that there are some reporting requirements on environmental auditors if an environmental problem is identified.
If there is an environmental problem, one would want to provide information about the problem, alternatives for solutions, with budgets and timing, all at the same time. That information should be presented in person to the lender.