This fall and winter renewal season will be challenging for both producers and lenders in many regions of the country. What are lenders doing to work with customers through the down economic cycle? This perspective can be very valuable to producers when sizing up their own particular situations.
Loans that are in financial difficulty are placed into a special asset division at financial institutions. Often these special assets are handled by a team whose primary responsibility is to work with accounts that are having difficulty meeting debt service payments or have violated loan covenants. Some proactive lenders are developing a pre-special asset division to develop corrective action before the account deteriorates to where both the producer and lender get into a lose-lose situation. Other lending institutions are developing an “urgent care unit” for accounts experiencing financial stress. Loan accounts in the urgent care unit are often monitored weekly or monthly and, in some cases, result in partial and total liquidation.
More lenders are utilizing a team approach, which often involves a loan officer and a credit analyst. A credit analyst will require more details and financial information and usually is more oriented toward the numbers.
Many lenders are stress-testing the cash flow for price, cost, and production changes. Proactive lenders will also financially stress test the balance sheet for a decline in livestock, equipment, and real estate values. In some areas of the country, up to a 30 percent decline in land values has emerged, influencing the collateral positions of lenders.
Other lenders are requiring that the producer develop a written plan for improvement. A production, marketing, and financial plan with various financial scenarios could become the plan that is required or requested by the lender. Requiring a written improvement plan has been particularly true for customers seeking debt restructures and refinances. Unfortunately, taking operating debt and converting it to longer terms results in the producer “kicking the can down the road” if there is no plan for improvement of cash flow to alleviate losses.
Expect your lender to call more face-to-face meetings to monitor financials so that adjustments can be made before the situation gets out of hand. Farm visits and a check on inventories, payables, receivables, and credit histories can be expected as fraudulent activity has been an increasing issue in U.S. agriculture.
Theroad to success in a financially stressed situation often requires lenders to work with the Farm Service Agency (FSA) or outside consultants to provide financial options. A financially stressed account requires everyone working together to develop alternatives for success. A side-by-side lender and borrower relationship will be necessary to navigate the economic rapids that are increasing in difficulty.
The opinions of Dr. David Kohl are not necessarily those of Corn and Soybean Digest or Farm Progress.
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