The emergence of so-called vulture funds that have purchased loans portfolios, including some farmer loans, sees Irish farming move into uncharted territory. While numbers are small, they could increase with the threatened sale by Ulster Bank of farmer loans that are in arrears. With incomes falling, more farmers are coming under pressure to meet repayments and, where required, get additional credit. Here we look how farmers can deal with this changing banking landscape.

Changed landscape

Banks on the move

Danske Bank, ACC and Bank of Scotland (Ireland) have all signalled that they are exiting the country. They have been working down their loan books for the last few years. They have been engaging with farmers and pushing some to refinance. Progress has been slow, especially where deals on write-off are attempted. The issue for some farmers is that all their security has been tied up, making it difficult to secure finance elsewhere. Banks are still here, but not all are fully committed to agriculture.

Listen to a discussion of current financial worries on farms in our podcast below:

Permanent TSB might not have been big in agriculture but is now nearly completely state-owned and not lending. Ulster bank, on one level, says it is committed to staying and is still lending. However, the bank’s recent actions suggest it is trying to tidy up its loan books to give it options.

Committed banks

AIB and Bank of Ireland are definitely the most committed at this stage and are actively looking for business. They are managing out their own bad loans and not looking to dispose of any agricultural loans.

Vulture funds

These are venture capital funds that have swooped to buy poor-performing loans. While mainly focused on bricks and mortar loans, the more recent moves could see them acquiring more farmer loans. They are unregulated but have to deal with clients though credit servicing firms such as Pepper Ireland and Capita Asset Services that are regulated by the Central Bank.

Credit unions

Not without their own difficulties in the last few years. They have been a good source for small amounts of money. There are some signs that credit unions joining forces can offer additional lending facilities to agriculture.

Alternative finance

Given the difficulty in the banking sector, alternative finance options such as asset leasing have become more popular. Glanbia’s recently announced Milkflex product is another example of non-traditional lending. Watch this space.

Timelines

Some farmers have been in talks with banks for two or more years on their debts. In some cases banks themselves have taken a long view in the hope that situations will change. The moving of loans into vulture funds is likely to see quicker timelines. They are more interested in getting a quick return. Many have timelines of just 18 to 24 months.

The 30-day timeline given by Ulster Bank appears to be a shot across the bow to get farmers to engage. “Expecting farmers to be able to refinance loans in that time frame is ridiculous,” said Tom Doyle, chair of the IFA business committee, which is calling for Ulster Bank to extend it. “If a farmer with a 100% credit rating and an excellent repayment capacity went into a new bank in the morning it would be a lot longer than 30 days for him to get loan approval, never mind someone in financially difficulty,” he said.

What to do

Don’t panic

There are options and it will all take time to work through. Take a step back and develop a plan for your overall business.

Get good advice

Your accountant should be your first call. Make sure they have experience in dealing with the credit servicing firms.

Establish the reason for the difficulties

Most farmers will know. Talk to your accountant and look at options. Be proactive. Look at forward cashflows. For farmers caught up in the Ulster Bank loans, if you don’t feel your loan should be considered for sale, contact the bank to ask why it was. The IFA has been contacted by farmers who a re not currently in arrears and were shocked to get a call from Ulster Bank. They have raised this with the bank which said it will review the cases. Ulster Bank did not enter loans into NAMA but set up its own internal section to deal with debts that went into arrears. It has sold loans before, some of which were from farmers. The bank did not give figures of how many farmers were involved more recently. It said 75% of the loans were in its recovery section for up to five years, so it should not be a shock to many farmers. The vast majority of loans are related to off-farm investments but there are also farmers who bought land at the top of the market, invested on-farm or ran into problems with cashflow at the wrong time.

Engage

Communication is critical. Banks have changed and it is more difficult to get to the people who make decisions. It is important for farmers to respond to letters from the bank or credit servicing firm where their loans are sold. If they don’t it opens the way for the company to take legal action and harms the farmer’s case. Arrange meetings and attend. Initially ask questions and listen. With vulture funds, try to establish their end game. In all cases, a sworn statement of affairs will be looked for. This is a document detailing net worth showing all the assets owned and also any other loans the farmer has.

Keep making repayments

Initially some advice where loans were sold was to stop repayments altogether in the hope of a write-down. Experience is showing that this approach can cause real difficulties. It does not increase the chances but if anything sees a more hard-line approach taken. It also works against your situation where you are looking to refinance loans with other banks.

Talk to other banks

Farmers should start talking to other banks. Bank of Ireland and AIB have told me they are in the market and are giving offers to farmers where loans have been or are threatened with being sold. Ulster Bank is also in the market and, ironically, has refinanced some loans they initially sold last year. The banks will look closely at repayment capacity and security before making a decision on the amount they are prepared to lend. They will also look at financial history. This is where stopping repayments can work against you. If the bank agrees to give a loan offer, this can be taken as part of the negotiation. In some situations it has enabled farmers to buy out the loans as part of a deal that could involve an asset sale. As one adviser said: “Whatever happens, the farmer will have to take some pain in selling assets to get a deal.”

Legal documents

The original terms and conditions come across with the loans and are the rules the vulture funds have to follow. If you don’t have a copy of them, get one from the bank or company. Farmers should look at their legal documents very carefully. One industry source said: “You should ask yourself where there were personal guarantees in place were they independently witnessed? Did you fully understand what you were signing? Are there any issues with the titles of the property?” What you are looking for is any leverage that can be used in the negotiations if it does get down to horse trading.

Negotiate

Everyone I talked to dealing with the credit servicing firms said there are tough negotiations involved. “They are there to get a return on the capital employed. There are a lot of rumours about what these funds paid for loans and many try to find out. However, this becomes irrelevant when you look at it in a case-by-case basis,” said Rory Flannery of IFAC Nenagh. Farmers are better off focusing on how funds look at security, loan-to-value ratios and assets.

The level of security against the loan is important according to former banker Willie Slattery who is working with farmers in negotiations. “Every situation is different. My experience is that when funds buy portfolios, the value of security against the loan has an impact on what is paid for each debt.”

For example, a farmer with a loan of €500,000 and security of €750,000 can be in a more difficult position than one with a €100,000 debt but just €50,000 security pledged. The fund will look to the security, assets and repayment capacity of the farmer during the negotiations.

David Sheane, FDC Cork, who is dealing with a number of cases, says the loan to value ratio is critical in the way that each loan is viewed. “You are in a stronger position if the debt is much larger than the market value of the security. Unfortunately for many farmers with land, their security is more than the debt,” he said.

Few wanted to go on the record with specifics. There have been deals done. In some cases, bank debt has been frozen allowing the farmer to match repayment capacity with loan repayments. I have talked to farmers who have got write-offs but again assets had to be sold as part of the deal. Many farmers who do deals are forced to sign non-disclosure agreements. It is also something farmers don’t go down the pub and say – “I got a great write-off today”.

Willie said: “I went through the 80s when the last financial crash hit agriculture. Banks at that stage had the security and while there were tough negotiations over two years, every case was resolved and deals were done with write-offs.” He feels that the current situation is going the same way and banks will have to write off debts. “There are some viable farming businesses that are over-laden with debt,” he said. Others feel the vulture funds don’t have the same understanding of farming that banks do and will have no issues with forcing farmers to sell land, even if it will make the farm unviable. One negotiator told me: “I asked one firm did they realise that this will put the farmer off the land. Their attitude was – ‘so what?’”

The big question is will this attitude change if they start forcing farmers to sell their farms? This could see a backlash like in the 80s where land will not be bid on at auctions.

Dealing with stress

Finally, stress can be a major issue and should not be taken lightly. Different people deal with it differently.

Some advisers have seen where people take their eye off farming which in turn suffers, adding to the cycle of stress.

It is vital that the family understands the situation and is unified. Talk about it to a trusted farmer or adviser. In some cases professional help is needed and should be sought.