As Ulster Bank is leaving the Irish market and Bank of Ireland is closing branches, there may be cases in which farmers will now need to switch to other financial institutions.
Banks loan books are made up of performing loans (repayments and terms being complied with) and non- performing loans (loans in arrears).
As Ulster Bank is exiting, the bank could decide to sell on their non-performing loans book(s) to an investment fund.
Funds that invest in debts considered weaker or in arrears are commonly referred to as “vulture funds”. Vulture funds tend to have a short-term strategy with regard to repayments of loans.
If your farm loans are in arrears, you have two choices – try to refinance/restructure with another bank, or if the loans are with Ulster Bank, the likelihood is they may be sold on as part of a non-performing loan book sale eventually. The buyer of these type of loans tend to be vulture funds.
Together with your accountant adviser you will need to do a business plan outlining the details of your existing loans and the exact proposition. If your loans are in arrears the business plan will need to outline the current reasons for the arrears (such as a TB outbreak, low profitability, change of system etc). Previous performance of loans is a good indicator of future performance, so your new lender will check your credit rating to see the historical performance of all loans. Refinancing or restructuring loans can help farm finance by extending the repayment terms, availing of a more competitive interest rate, or amalgamating loans to reduce the overall repayment amount. Generally, banks will assess repayment capacity based on the average profitability over the last three to five years to get a better understanding of the farm business performance. The more information available to the bank, the easier it will be to get approval for the refinancing of loans.
Dan is a dairy and beef farmer. He owns 70ac, and rents a further 50ac. He is married with one-year-old twin boys. His wife works in the home and farm. He has no mortgage. Dan’s farm debt is as follows:
Dan’s average net profit over the last three years was €75,000. His most recent net disposable income after tax and drawings is €54,000, not sufficient to make all his loan repayments. If Dan restructures his land loan over 15 years his annual repayments will decrease by €11,700 to €46,000 annually.
If Dan restructures his land loan over a 20-year period, his annual repayment will decrease to by €17,400 to €40,300 if using the same interest rate (IR) of 3.5%.
Either restructure (extending repayment terms) will enable Dan to make his repayments. His tractor loan is short-term debt so his financial position will further improve by €13,200 once that loan is repaid. It is likely Dan will be able to refinance.
If you in financial difficulty or are aware your loan is in arrears, it is important to seek professional advice to enable you to engage with these vulture funds. Engagement is key here. You may need insolvency advice. You will need to engage with a personal insolvency practitioner (PIP) who will help you to discuss all options and decide on the best solution for you. You can get a list of registered PIPs from the Insolvency Service of Ireland (ISI).
Where to get insolvency advice
ISI is an independent statutory body which was established on 1 March 2013. Its objective is to restore insolvent persons to solvency. It manages and processes the timely resolution of bankruptcy and insolvency solutions. It also regulates and monitors the performance of PIPs and approved intermediaries (AIs).
Debt solutions that may be available to you in an insolvency situation
A PIP can outline to you the many solutions that may be available to you, such as, immediate court protection, restructure of loans, extension of payment terms, reduction in interest rates, potential write down of debt, and most importantly the retention of your home and farmland.
If in an insolvency situation, and your loan has been sold you must avail of insolvency advice with a PIP, together with your accountant and solicitor. There can be many solutions in these situations, there can also be many reasons why it has happened such as animal health, poor investment, over extended on the farm, a variety of reasons. Whatever the reason, action is required by you to protect your farm.
Generally banks are willing to work with customers. Vulture funds have a much more short term strategic view. Therefore, it is imperative you get the appropriate advice early.