The rural lending rate is presently at an appealing level but the lower projected Fonterra payout and a little-better-than depressed meat industry does not mean that farmers are rushing into adding more debt.
That’s possibly just as well.
The country’s only rural insolvency specialist believes more rural businesses will face going to the wall in the next 12 months.
Dennis Wood, who heads Act Three Rural Insolvency and Investigations, predicts rural receiverships numbers will keep pace with rising rural bank debt, currently around $49 billion.
He says that a disproportionate number of rural businesses account for a higher percentage of that debt, as the currency remains high and NZ continues to be exposed to global market forces.
Many rural businesses particularly in dairy, sheep & beef, viticulture and horticulture are experiencing acute financial stress.
Mr Wood says that some of those in receivership are extreme examples of “financial delinquents” who fail to heed warning signs or listen to financial advisors or bankers.
He says they are often “cowboys (sometimes entrepreneurial);” those who must live on ‘credit’ and are poor listeners and managers.
Their accounting finesse is often ‘zilch’ and they don’t know the meaning of a forecast cash flow,” Mr Wood says. “Some seem to have an unwitting desire to be dealt with by a ‘commercial undertaker.’ Others will go to great lengths to hide toys or valuable assets when they are placed in receivership.”
Mr Wood, an experienced farmer, business & financial management consultant and former Police Detective Inspector, works nation-wide with the country’s leading rural, banking, legal and commercial sectors to help resolve insolvency, taxation, shareholding and financial issues or other situations for which sometimes there isn’t succinct or clear cut description.
He is also consulted directly by many rural business owners looking to resolve farming and financial crises.
Since early 2011 there have been at least 50 rural receiverships and since the beginning of the Global Financial Crisis around 200 receivership appointments.
Mr Wood says that doesn’t include the huge number of rural businesses that have voluntarily been wound up, liquidated and/or are the subject of mortgagee sales.
His experience is that many business owners leave key financial decisions until it is too late.
“In some cases they have already been tapped on the shoulder by their accountant to wind back spending or have been warned by bankers to revise their business strategy,” he says.
“All the main banks in NZ have a dedicated team that deals primarily with stressed key accounts. Different terminology is used in different banks and include, for example: Credit and risk assessment; Strategic business services; Rural Lending services; Manager – Rural Solutions.”
“When the lender moves your account into one of these divisions, it is time for you to start listening – big time!” Mr Wood says. “Key people assess the lender’s risk and often work in the client’s best interest to ensure the business is viable or salvageable in some form.”
“What I usually see are the delinquents who won’t listen to their bankers and think they know best. So the business ends up either being liquidated or placed in receivership.”
Mr Wood says that in the rural sector, it is rare to see a business completely wound down. Usually he will try to find an alternative solution.
He says much of his business comes from farmers, investors and lenders who see problems mounting, financial or otherwise, and realise they urgently need to get help!
“Often we take a global overview to assess all the problems rather than just dealing with one issue. The aim is to give enough breathing space to allow the business to avoid mortgagee sale or receivership and get back on its feet.”
Options may include initiating debt management plans; reviewing & restructuring cash flow; refinancing; introducing equity partners; formal creditor compromises; arranging payment plans; formal proposals for debt repayment to IRD (who are often more sympathetic than many would have you believe).
There will also be some “biting the bullet” through sale of shares, assets and ‘toys.’
Precursors to Receivership
Mr Wood says that rural businesses that fail often have the same tell-tale signs;
• Liquidity problems
• Owners who think they know best and won’t listen to advice from their banks manager or financial advisers;
• Owners not focusing on their business because they have other businesses;
• Owners constantly “fighting fires’ – with legal arguments draining cash flow;
• Disputes with debtors and creditors;
• Poor management decisions;
• Diverting funds – fraud & theft;
• Debt out of hand;
• Lots of inter-company debt;
• RMA issues – compliance and prosecutions;
• Animal welfare issues;
• Not resident on property – overseas;
• Excessive capital expenditure;
• Board & Governance issues;
• Excessive personal drawings;
• Spending on ‘toys’
• Not paying tax obligations such as ‘PAYE;’
• Lenders’ ‘equity’ at risk;
• Disgruntled creditors taking action to windup which in turn causes breach of banking covenants e.g. caveats and charges on titles