Lender's radar screen

I received a question from a producer that was very intriguing and in tune with the times, “What are five factors high on the radar screen for agricultural lenders in 2019?”

First, many lenders are going to be examining the historical performance of producers that may foretell success in repaying loans in the future. Cash flow and profitability will be scrutinized, particularly for those producers who have shown a pattern of refinancing or restructuring debt over the past six years of the economic reset. The producer’s ability to outline a recovery plan that can be monitored in 2019 will be critical.

Expect your agricultural lender to do sensitivity testing on declines in land values and the impact on their collateral position. If you are located in areas that are prone to land value corrections, then the sensitivity shock could be as much as a 25 percent reduction in land values.

If you have refinanced or restructured debt to build working capital, then your lender will monitor both positive and negative changes in profits and cash flow. They will also calculate the burn rate on your working capital; divide your losses into your total working capital to determine how long it will take to eliminate the excess reserves. 

Lenders will conduct much more due diligence in the coming year. Farm and ranch inspections will pick up and more documentation, such as serial numbers on equipment, will be required. Collateral inspections will be more frequent and require that the number of animals in the barn, feedlot, or field are reported and the number of bushels in the bin will be closely examined. Lenders will also perform due diligence on vendor credit and accounts payable.

Be prepared to provide evidence of your market contracts or marketing plans. One area lenders are becoming very concerned about is agribusiness credit. Recent issues with local cooperatives have sent chills down the spines of agricultural lenders and they are wondering, “Who is next?” Fraudulent activities are alive and well in this economic downturn.

Finally, your management and character will be more closely assessed in an objective manner. This is often a difference maker on the bottom line.

I realize that I have outlined more than five factors. As the year comes to an end, the uncertainty of what lies ahead has many lenders closely examining their credit relationships to identify potential risks. Land values and collateral, while very important to bridge in tough economic times, will be closely examined. Lenders are going to determine how losses impact the preservation of wealth, particularly if the downturn persists for another five years.

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