Industry data and our findings during our reviews indicate downward creep in agriculture loan quality and a material increase in carry over debt. As per Regulatory definition, agriculture carry-over debt is:
The portion of an Ag operating line that the borrower cannot repay from operating production revenue (for example, from crop, livestock, or milk sales). It represents a substitute for investment capital and must be serviced through future cash flow, sale of unencumbered assets, or other sources.
Funding carry over debt is a part of lending in the agriculture industry and not inherently ‘bad’. Agriculture debt, as with all other lending, will be viewed on overall underwriting, concentrations of credit and the segment’s asset quality. Equity in hard collateral, dirt lending alone, is not sufficient to prevent regulatory criticism of agriculture carry over debt.
The presence of significant carryover debt may require restructuring the borrower’s overall debt exposure. Depending on variables including the borrower’s leverage position, projected cash flows, and balance sheet, it may be appropriate to restructure carryover debt into amortizing medium-term loans while continuing to finance current operations with short-term loans.
Of particular concern are borrowers with multiple years of carry over debts and loans that have been granted on extended amortization periods – in excess of five years. For some farmers, alternate means of repayment (outside of asset liquidation) would not appear to exist. Regulatory guidance is clear; the carry over loans are to be identified, collateralized, and properly structured.
A best practice is to segregate operating notes by crop year and not comingle operating proceeds between the different growing seasons. If loan proceeds are comingled for more than one crop year, management should be able to document the operating proceeds for each year to support management’s risk ratings and repayment analysis. When collateral does not cover carryover debt and repayment capacity is not evidenced, the carryover balance should be classified and the examiner needs to determine whether a loss rating is appropriate.
Regulatory guidance indicates that carry over debt is not inherently ‘bad’, but how the debt is rated in an examination will depend on file documentation and underwriting. Collateral, or loan to value, alone will likely not be sufficient to prevent regulatory criticism. As with all loan relationships, the bank is expected to fully document and underwrite both borrower and global repayment ability.
SOURCE: http://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/pub-ch-agricultural-lending.pdf
The portion of an Ag operating line that the borrower cannot repay from operating production revenue (for example, from crop, livestock, or milk sales). It represents a substitute for investment capital and must be serviced through future cash flow, sale of unencumbered assets, or other sources.
Funding carry over debt is a part of lending in the agriculture industry and not inherently ‘bad’. Agriculture debt, as with all other lending, will be viewed on overall underwriting, concentrations of credit and the segment’s asset quality. Equity in hard collateral, dirt lending alone, is not sufficient to prevent regulatory criticism of agriculture carry over debt.
The presence of significant carryover debt may require restructuring the borrower’s overall debt exposure. Depending on variables including the borrower’s leverage position, projected cash flows, and balance sheet, it may be appropriate to restructure carryover debt into amortizing medium-term loans while continuing to finance current operations with short-term loans.
Of particular concern are borrowers with multiple years of carry over debts and loans that have been granted on extended amortization periods – in excess of five years. For some farmers, alternate means of repayment (outside of asset liquidation) would not appear to exist. Regulatory guidance is clear; the carry over loans are to be identified, collateralized, and properly structured.
A best practice is to segregate operating notes by crop year and not comingle operating proceeds between the different growing seasons. If loan proceeds are comingled for more than one crop year, management should be able to document the operating proceeds for each year to support management’s risk ratings and repayment analysis. When collateral does not cover carryover debt and repayment capacity is not evidenced, the carryover balance should be classified and the examiner needs to determine whether a loss rating is appropriate.
Regulatory guidance indicates that carry over debt is not inherently ‘bad’, but how the debt is rated in an examination will depend on file documentation and underwriting. Collateral, or loan to value, alone will likely not be sufficient to prevent regulatory criticism. As with all loan relationships, the bank is expected to fully document and underwrite both borrower and global repayment ability.
SOURCE: http://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/pub-ch-agricultural-lending.pdf
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