When debt becomes a real problem

When a farmer finds themselves in the position of being unable to service their debt obligations, there may be a temptation to try to ignore the problem in the hope it will somehow go away.

Robert Malone from the IFA’s farm business committee and the organisation’s debt support services point of contact, told the Irish Farmers Journal that this is a tactic which is bound to fail.

“Engagement with the people that matter” is the only way to find a resolution, he said.

The people that matter are the people who send letters every month to the borrower updating them on how much money is owed and often demanding full, immediate payment of outstanding amounts. There are other people who might offer advice, but unless someone is talking to the company – usually a vulture fund – then the matter can quickly progress to a liquidation of assets, ie the forced sale of the farm.

As we outlined last week, there is often a considerable length of time between a loan secured on land falling into arrears and the security being realised through an auction, but this does not mean people should wait before they start talking to the people that matter.

Motivation

There are three key players in any loan situation like this. The first is the borrower, and they are motivated by the desire to hold onto their land and put in place a solution that works for them. The second is the bank who originally gave the loan, and they are motivated to get the non-performing debt off their books, either through agreement with the borrower or through a sale to a vulture fund.

The third is the vulture fund and they are motivated solely by profit. They will have bought the loan from the bank, usually as part of a package and at a discounted rate. Their ambition is to get what they paid for the loan plus a profit, and to do this all as quickly as possible.

Agricultural loans in this scenario are considered to be among the most valuable to the vulture fund, as they are often significantly over-securitised. A farmer may have €500,000 in debt secured on a 100-acre farm.

With so much excess security in place, the vulture fund is in a strong position when it comes to making its money back and securing a profit on the loan.

For the farmer delaying the inevitable by either ignoring the vulture fund or trying to drag out proceedings as much as possible may seem like a good idea, as they can continue to farm until the land is sold out from under them.

In several cases we have seen farmers continue to try to hold possession of the land even after it has been sold to a third party by the vulture fund.

Timing

If the arrears are small, then a farmer can come to an arrangement with their bank. Again, early communication with the lender is critical here, as they will be in a better position to judge the full set of circumstances. If the arrears are larger, then the farmer may decide to sell some of the land in order to take care of the debt. While this might seem like an anathema to many farmers, selling some land to dispose of a debt now could be better than having the entire holding sold later at a knock down value in an auction. Farmers should also be aware of the amount of further mental stress they will avoid by making a difficult decision early.

As long as the loan remains with the original lender, things tend to move fairly slowly. However, once they are sold to a vulture fund, the pace – and pressure – can pick up significantly. Often farmers who have their loans sold will also find that they have lost access to overdraft facilities with their lender and will find it almost impossible to borrow in future.

Vulture funds want to make their return as fast as possible. If there is no communication from the borrower, then they will do whatever they can to move things along. This will go as far as listing the property for sale in an online auction in order to bring the farmer to the table to see what they can offer.

Malone was very clear that once an auction does actually take place and the land is sold, there are no more deals to be done. Property law in Ireland is very clear on ownership rights. However, he said that he has had talks with vulture funds and found that they are willing to discuss other arrangements ahead of a sale. They don’t particularly want to sell the farm, but they do want to make their return on the investment in the loan.

If there is a chance of a deal, they will pull the land from the sale.

Personal Insolvency Arrangement

One route that is open to farmers (and many other borrowers in arrears) is to enter a Personal Insolvency Arrangement (PIA). These were introduced in 2012 and allow for the agreed settlement of up to €3m, or higher if creditors agree.

While a PIA requires the support of creditors representing 65% of total debt, there is a chance to get a court review of any rejection by those creditors. It is also important to note that farmers in a PIA may have considerable difficulty putting new credit arrangements in place.

In a hugely significant ruling for farmers in December of last year the Supreme Court clarified the legal test for insolvency. The case involved a Wexford farmer with €1.1m of debt and assets of €1.8m (almost exclusively farmland). As the farmer’s assets exceeded his debt the vulture fund, Promontoria, argued that the farmer was not insolvent and therefore his PIA, which was approved in both the Circuit and High Court, should not stand. However, the Supreme Court found that the PIA, which restructured €874,000 of debt over 30 years, was valid. The court considered that the farmer involved was insolvent due to his limited cashflow from his farming business.

Speaking after the ruling, Personal Insolvency Practitioner Gary Digney said that individuals who are asset-rich but cash poor can now avail of personal insolvency arrangements. He added that every case has to be evaluated individually as there is no one-size-fits-all approach to what is often a very complex matter.

Comment

In our conversations with people involved in helping farmers who find themselves in difficult debt positions, there is one single piece of advice which is constant – ignoring the problem will only make it worse.

The ruling from the Supreme Court at the end of last year is certainly a positive move for farmers as they often find themselves in the position of having assets which vastly exceed their debts, but with cashflow which is unable to meet the repayments on those debts. Allowing those farmers into the PIA system could be a route to allowing them to keep their farm.

However, a PIA also requires those farmers to engage with their borrowers. If the farm gets to the point where it is sold at auction by the vulture fund, it is too late to come to any kind of agreement.

In brief