Dr. David M. Kohl. (540) (Alicia Morris) (540) (Angela Meadows)

Transcription

1 BALANCED APPROACH TO AGRICULTURAL CREDIT ANALYSIS Dr. David M. Kohl Professor Emeritus, Agricultural and Applied Economics Member of Academic Hall of Fame, College of Agriculture & Life Sciences Virginia Tech, Blacksburg, VA (540) (Alicia Morris) (540) (Angela Meadows) November 30, 2017 Macro Clinic Video Blog: Road Warrior of Agriculture: Ag Globe Trotter: Dave s GPS & Dashboard Indicators:

2 Agricultural Economic Cycle Spectrum: Stages of the Financial Statements Opportunity Stress Profit/Cash Flow Liquidity/Working Capital Core Equity Top 40% of producers Tweeners Bottom 30% of producers 2

3 Recent Views of Ag Lenders: Factors Creating Financial Stress to Portfolio Factors Midwest Ranking Coast Ranking Negative Profits 1 1 Growing/Expanding 6 4 Land Value Decline 3 6 High Family Living 2 3 Loss of Staff 5 2 Competition/Financing 4 5 Ranking Scale: 1= Highest Concern 6= Lowest Concern 3

4 Economic Warming How quick to cash? Collateral Mountains Business Net Income Spring Working Capital Hills Non-Farm Earnings Spring Cash Peak Inventory Pinnacle Capital Infusion or Refinancing Canteen Accounts Receivable Ridge Prepaid Promise Prosperity Valley 25% Killer Toy Swamp Lake Earnings Family Living/ Dividends Creek 50% Adapted From: Harlan Hill- Hill Financial Education Earned Wealth Inlet Cap Ex & Growth Run Postponed Principal & Interest/ Operating Delta Income Tax Gulch 25% *EBITDA- Earnings Before Interest, Taxes, Depreciation & Amortization 4

5 Vulnerable, Resilient and Agile Cash Flow Profits Criteria Vulnerable Resilient Agile ¹Operating Expense/ Revenue >85% 75-85% <75% Coverage Ratio <110% % >150% ROA <2% 2-8% >8% Term Debt/EBITDA >6:1 3:1 to 6:1 <3:1 ¹ Operating Expenses (excluding interest & depreciation) 5

6 Family Living Summary 6

7 2016 Family Living 7

8 The Burn Rate Working Capital Adversity vs. Opportunity Defensive Adversity Oriented Current Assets: $2,000,000 -Current Liabilities: $1,000,000 = Working Capital: $1,000,000 Offensive Opportunity Oriented Current Assets: $2,000,000 -Current Liabilities: $1,000,000 = Working Capital: $1,000,000 Projected Loss: $500,000 Working Capital = 2 Years Projected Loss Debt Service(Existing & New) Payments: $200,000 Working Capital = 5 Years Total Debt Service Payments Red < 1.0 Year = Vulnerable Yellow Years = Resilient Green >3.0 Years = Agile Red < 2.5 Years = Vulnerable Yellow Years = Resilient Green >5.0 Years = Agile 8

9 Five Good Reasons for Working Capital secondary line of defense with issues of cash flow and profits flexibility in marketing cash discounts negotiated on cost of inputs capital expenditures machinery land livestock self insurance, risk management, nobody cares 9

10 Burn Rate on Core Equity Adversity vs. Opportunity (Assume $500,000 Earnings Loss & 20% land value decline) Assets- Market Value 1. Long Term (20% Decline on Land) Estimated Value $6,000,000 $4,800,000 Loan Maximum X 70% X 70% Collateral Position = $4,200,000 = $3,360,000 Remaining Principal - $2,200,000 - $2,200,000 Equity Excess Reserves = $2,000,000 = $1,160, Intermediate $3,000,000 X 60% =$1,800,000 - $800,000 = $1,000, Current $1,650,000 X 80% =$1,320,000 - $860,000 = $460,000 Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $2,000,000 = 4.0 Years Earnings Loss¹ $ 500,000 20% Decline Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $1,160,000 = 2.32 Years Earnings Loss¹ $ 500,000 ¹ Assume Earnings Loss of $500,000 Red < 4.0 Years = Vulnerable Yellow Years = Resilient Green >7.0 Years = Agile 10

11 Five Factors Influencing Burn Rate on Core Equity asset value decline advance rate amount of losses cash/flow profits taxation of sale proceeds- deferred tax liability sense of urgency - negotiations 101 machinery and equipment depreciation cattle die/disappear 11

12 Take Home Tools Regardless of the Cycle: Accrual Analysis Seven Major Questions/Answers for Accrual Analysis Question Positive Negative 1. What is the direction of inventory value? 2. What is the direction of aging accounts payable? 3. What is the direction of accrued expenses? 4. What is the direction and aging of accounts receivable? 5. What is the direction of amount of prepaid expenses? 6. Operating lines of credit vs. inventory/receivables 7. Are current assets quick to cash? 12

13 Take Home Tools Regardless of the Cycle: Refinancing Request Filter Questions Questions to ask before refinancing a customer: Refinancing Request Filter Questions Yes No Poor lifestyle habits (family living, killer toys)? Poor management habits? Poor marketing and financial habits? Failure to build working capital in good times? Uncontrollable events (macro or micro)? Repeating refinance cycle multiple times? Poor quality collateral assets (land, machinery, livestock)? 13

14 Management Checklist Question Yes No Do you know cost of production? Do you know cost of production by enterprise? Do you have modest family living expenses? Have you shed non-productive or non-economical assets? Do you have a written improvement plan? Do you practice four corners of business success? Plan, Strategize, Execute, Monitor Do you execute a marketing plan? Do you have a handle on record keeping? Do you sweat the small stuff? Are you preparing for the next generation? 14

15 Character Considerations lending equation: balance between numbers/ratios and nonfinancial factors zone of accuracy on asset values and income: 98% rule fraud: grain bin and livestock examples materialistic pursuits/extra toys couple going the extra mile/son s mistake misuse of operating funds under the table money unwillingness to develop a recovery plan: side by side advisory team false tax documents victims and know it all personalities vs. commitment to follow thru 15

16 One Page Recovery Plan goals one year and five year business, family, & personal cash flow: production: plan, strategize, and metrics marketing: plan, strategize, and metrics systems: plan, strategize, and metrics break evens: production, price, and cost sensitivity analysis: production, price, and cost plan for monitoring: monthly, quarterly advisory team other income equity/recurring/non-recurring people s roles, rules of engagement, checkpoints and communications plan for B/C/D 16