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.
Journal of
Corporate
Renewal
The professionals
involved—up to
and including
the bankruptcy
judge— may have