Creative financing cuts stress, saves customer relationships.
By Aleks Ridge
It’s easy to be an ag banker during good times, and ag banks enjoy enviable reputations within their communities. It is during stressful times that banker reputations are cemented for the long term. Does your bank work with its customers as they adjust their operations? Does your bank seek out and implement alternate lending strategies in support of your borrowers?
The stresses in agriculture are compounding, particularly in the corn belt. Economists are projecting 2018 prices similar to the past two years. U.S. Department of Agriculture and CME Futures also closely align with recent prices. Cash flows are constricted as farmers adjust to the “new normal” of lower commodity prices, rising interest rates and increased costs of living.
Ag lenders are having to adjust to this new normal as well, and a situation that was resolved in North Central Iowa just a year ago illustrates one way they are coping.
Conterra, an agricultural asset management firm serving institutional investors, banks and other lenders, was approached by a bank that had a previous relationship with a grain farmer. The farmer’s current lender had recently decided that it was unwilling to renew his operating line, so he called his former bank. This bank, wanting to regain the relationship, was interested in providing operating financing for the 2017 crop year. However, two consecutive years of losses resulted in a growing balance on the farmer’s operating line and a negative working capital position.
The bank could not qualify the loan under its policies but was aware that Conterra offered alternative solutions and made a call. This led to a meeting with the client, where it was refreshing to note that he had already begun working to adjust to new realities. He had reassessed the profitability of his rented acres and, as a result, reduced the size of his leased acres by roughly 60 percent for 2017. This allowed him to surrender his most expensive ground and sell equipment that was no longer needed to support the smaller operation.
An analysis of the operation concluded that cash flows would remain tight; however, loan-to-value and the post-close balance sheet ratios were well within the creative asset management firm’s guidelines. Ultimately, Conterra approved a loan to restructure the remaining debt as the applicant continued to work to right-size his operation. The transaction closed in March 2017, on a three-year, interest-only term. The loan provided the banker with a renewed relationship, a portion of the origination fee and a field servicing fee over the life of the loan. Once the three years is up, the farmer will be positioned to qualify for traditional financing, and the bank will be able to retain this customer.
Keeping the bank in the process is important. As Conterra Managing Director Nick Stokes puts it, “Our business philosophy is structured around maintaining personal relationships. We understand the importance of the local lender staying ‘face-front’ to its borrowers. Since our intent is to return the borrower back to a bank on solid terms, we actively partner with lenders. They are truly considered our eyes on the ground.”
In return for serving as a field servicer, collecting financial information, conducting site visits and providing other information as required by loan covenants, Conterra shares origination fees and provides a field-servicing fee to the bank. Lenders are able to shed credit risk and improve portfolio quality while maintaining a positive relationship with their customers.
Conterra works with underperforming agricultural loans to finance borrowers that are in need of an alternate source when their traditional lender is not an option. The company’s focus on the ag industry, Stokes points out, provides an understanding that each situation is different and underperforming borrows require tailored solutions. This includes transitional financing, debt restructuring and bridge loans, all structured in a way that improves the borrower’s ability to pay and to realign to new realities.
Conterra listens to both the bank and the customer and supports myriad ideas to adjust the operation to become financially viable, according to Stokes.
For example, in central Nebraska, a feedlot and grain operation experienced significant losses through the downturn in beef prices in 2015 and 2016. Compounding the working capital issues was a recent expansion that added 50 percent more capacity to the feedlot, much of which had been funded with short-term debts. The operating commitment was fully drawn, and losses had been carried by a correspondent bank. It was clear that a restructure was necessary in order to inject equity into the operating line and liquidity into the operation.
The correspondent bank and the primary lender had a long-term relationship with the operator and wanted to find a way to maintain the operating line, while removing the risk of the long-term notes. By restructuring a portion of the short-term debts onto the real estate and refinancing the existing real estate mortgages, Conterra was able to provide the operation with much-needed liquidity. The operation was too highly leveraged and needed to reduce debt to remain economically viable in the long run. Therefore, Conterra was quick to support the borrower’s intent to sell a quarter section of ground, with proceeds being used to reduce outstanding debts.
The transaction closed as a three-year, interest-only term, allowing the correspondent bank to maintain the operating relationship with its client bank while earning a share of the origination fee on Conterra’s loan and a field servicing fee over the life of the loan.
Stokes points out that his company understands the needs of agriculture in this “new norm,” and that not all borrowers look the same. Solutions can be tailored to meet the needs of borrowers where traditional financing just doesn’t fit. Available options include transitional financing, debt restructuring, bridge loans and other special circumstances, all structured in a way to improve the borrower’s ability to pay.
Essentially, Conterra allows the farmer time to adjust to today’s environment and maintain a positive working relationship with his/her banker.
When Conterra was established in 2014, founder Paul Erickson believed that U.S. agriculture was under-capitalized. Ag borrowers that did not meet traditional lending standards had significant problems finding debt to restructure their operations. The vision Erickson had for Conterra was to not only create a company that provided competitive long-term fixed rates for healthy borrowers but to create cost-effective options for borrowers that were stressed and needed to restructure.
In 2015 the Conterra Fund was created to help answer this challenge and help banks cope with the new realities. Located in the heart of the Midwest and focusing on agriculture as its sole business, the company has created varied opportunities for agricultural borrowers that meet traditional lending standards as well as cost-effective solutions for borrowers that need to restructure or just need more flexible capital.
With nearly $3 billion in loans and more than 7,000 borrowers, Conterra has successfully provided referring and correspondent banks with programs to navigate the new normal while reducing risk.
Aleks Ridge is a credit coordinator/marketing coordinator at Conterra Asset Management. Contact Ridge at email@example.com.