Journal of Corporate Renewal

first liens on land and other operating assets. Rarely does one encounter cash-flow-based senior loans in production ag, let alone second lien loans, mezzanine debt, or preferred equity. As a result, there are relatively few seats to be filled at the restructuring table.

Experience also suggests that lenders with a large book of agricultural business tend to be somewhat more conciliatory in their negotiations and renegotiations with existing credits than lenders in other sectors. For instance, the Farm Credit System, a national network of credit providers established by Congress in 1916 and now providing fully one-third of rural America’s ag producers’ credit, is cooperatively owned and run by its borrower members. As a result, members of the Farm Credit System have relatively borrower-favorable requirements they must abide by in negotiations with defaulted borrowers.

agribusinesses. In a world in which agreements often are still consummated with handshakes rather than written contracts and neighbors and neighborly relations are frequently important contributors to business success, bankruptcy and foreclosure proceedings can be confusing and unnerving for ag borrowers. Turnaround professionals should be mindful of this unfamiliarity with the process when negotiating ag restructurings or workouts.

limited experience in an agricultural restructuring compared to their peers involved in other sectors of the economy. While outside investors involved in bankruptcy cases filed in remote jurisdictions may worry about the impact of local favoritism (also known as “home cooking”), of greater concern is unpredictability of the process. The combination of the possible lack of prior experience by these professionals, of clearly settled case law in the jurisdiction, and of a relatively consistent understanding among professionals of what constitutes “market” in any situation may create greater unpredictability, delay, and expense in a restructuring.

Finally, relative to the size of their balance sheets, agricultural operations tend to have less in-depth internal finance and accounting capabilities. In part, this may be because their finance and accounting needs are usually relatively straightforward, with uncomplicated balance sheets, little in the way of accounts receivables (A/R) collection requirements, and consistent business models, all of which require straightforward budgeting and planning, etc.

The principals of agricultural production companies are often farmers who have lived and worked on their farms for much of their lives. These businesses are often passed down through families for generations. This tendency for agribusiness to be intertwined with family heritage can create strong emotional ties between borrowers and their businesses. That bond, coupled with complex and unfamiliar legal proceedings, can lead borrowers to include factors in their cost-benefit analyses that strike outsiders as emotional or irrational.

In agriculture, where the principal can be the CEO, COO, and CFO all rolled into one and still may have to drive the combine, the demands of running the business may leave borrowers with little time to focus on the courtroom. Add to their busy schedules their inexperience in hiring, supervising, and evaluating professional service providers, and it’s easy to understand how ag borrowers may take their eye off of their own professionals and legal counsel, allowing fees to accumulate faster than they otherwise might if the principal were more closely involved. Likewise, in bankruptcy situations in which the borrower could lose control of the business, there may be fewer checks on professional fees, given that the creditor/lender will likely have to foot some or all of the bill.

In addition, agricultural lenders historically have required relatively less periodic reporting from their credits than is required in other sectors of the economy. As a result, the accounting and finance capabilities may be adequate to control the business during normal times, but generating the quantity and quality of timely reporting that will be expected when times grow tough may prove difficult.

The prospect of losing control not only of their business but also their home can provoke borrowers to reject realistic workout or settlement options that would otherwise be reasonable. In turn, principals may become withdrawn from or distrusting of workout professionals, even those who are on their side. The result can be lengthy legal proceedings, higher professional fees, and a deterioration of the underlying business while the principals are distracted by courtroom events.

Establishing credibility with a principal,
especially in cases of involuntary
transitions, is necessary to mitigate the
emotional risk involved in ag workouts.
The agricultural sector in particular
is not accustomed to dealing with
turnaround professionals, whose “black
hat” reputations may precede them. To
establish trust, workout groups
should make conscientious
efforts to keep borrowers
informed in each phase
of legal proceedings
and clearly explain the
costs, benefits, and
probabilities of different
courses of action.

April

2013 People As is the case for most business people, a courtroom can be unfamiliar territory for principals of

Market Volatility In agricultural industries, where the inputs or outputs of production (or in many cases, both) are commoditized goods and where small changes in productivity may have disproportionate impacts on profitability, businesses may be characterized as “simple but not easy.” That is, agribusinesses are simple to understand at a conceptual level, but make and lose money at the margin and require deep operational expertise (often characterized as “intuition”), financial ingenuity and flexibility, and careful risk management to succeed.

Whether through cash reserves, a line of credit, or private investor backing, access to capital is essential to achieving sustained success in agriculture. Commodity markets can turn overnight and leave ag producers facing narrow or even negative margins for an indefinite amount of time.