Agrilend: The Ability To Lend Where Banks Cannot
The Problem with Bank Loans
The Institutional management of credit, operational, and market risk together with determining the levels of economic capital required to withstand such risk have become standardized to a very conservative model so consequently Agricultural Businesses have been at the mercy of The Major Components of The Farm Credit System.
Let me put it to you bluntly.
Banks are not lending. Agrilend is.
Agrilend has been in business for over 24 years, first registered as Servicios Financieros de Agricultura, S.A. in Colombia. Agrilend extended its growth incorporating two other entities controlled by the Colombian Parent company to be domiciled in The United States of America, the first being Agriculture Services & Supply, Inc., registered as a for profit corporation in Florida in November 1, 1994 and then its financing lending operation Agricultural Mortgage Company of America, LLC License Number ML0100663 incorporated on the 1st of May of 2001.
Agrilend let its Commercial Lending license to expire in August 31, of 2002 to assume more the business model utilized in Private Equity and not just restricted to the banking regulations of commercial lending. Primarily the business model now connects American Farms in distress to international investors looking to invest in the American Agricultural Business sector.
The real growth of the company has occurred during the last preceding 19 years in operation throughout 6 of its subdivisions in terms of agricultural finance, trade, export, import, production, distribution, manufacturing, and portfolio diversification. Within this timespan, Ethanol, Rubber, Palm Oil, and Biofuels accounted for slightly less than 0% of its capitalization and market share. Cotton, Timber, Wood, Pulp, and Paper at approximately 3%. Wool, Lumber, Cashmere, and Silk at approximately 4%. Grains, Corn, Wheat, Soybeans, Rice, Crops, Fruits, and Vegetables approximated at 10%. Sugar, Cocoa, Coffee, Tea, and Citrus at approximately 30%. Lastly, Orange Juice, Livestock, Dairy, Cattle, Poultry and Eggs accounted for most of its expansion at an approximation of about 44%. Agrilend Members share the investors of its Agrilend Membership by connecting the financial resources of MERCOSUR.
Why Farmers use Agrilend For Loans
The problem with traditional Agricultural Lending is beyond Portfolio Theory, Diversification, Credit or Operational Risk, as well as Financial Servicing Capacity to service debt obligations in unpredictable markets predicated by supply and demand. Its problem is the Federal Reserve and a lack of understanding Commodity prices influenced by intermarket technical analysis conditioned to incremental, often unpredictable movements in bonds, stocks, treasuries, utilities, interest rates, and as well as international currencies pegged to the U.S. Dollar.
Federal Deposit Insurance Corporation(FDIC) has a very regulated and structurally implemented framework that governs Asset Liability Management which has a strong impact to the profitability of Agricultural Businesses where Commodity prices fluctuate according to Risk-Neutrality.
(FDIC) Maintains an Interaency Policy Statement on Funding and Liquidity Risk Management.
The Office of the Comptroller of the currency (OCC), Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) (collectively, the agencies) in conjunction with the Conference of State Bank Supervisors (CSBS) are issuing this guidance to provide consistent interagency expectations on sound practices for managing funding and liquidity risk. The guidance summarizes the principles of sound liquidity risk management that the agencies have issued in the past and, where appropriate, harmonizes these principles with the international statement recently issued by the Basel Committee on Banking Supervision titled “Principles for Sound Liquidity Risk Management and Supervision
The exact roles and perimeter around Asset Liability Management can vary significantly from one bank (or other financial institutions) to another depending on the business model adopted and can encompass a broad area of risks.
The traditional Asset Liability Management programs focus on interest rate risk and liquidity risk because they represent the most prominent risks affecting the organization balance-sheet (as they require coordination between assets and liabilities).
Matching Total Assets with Total Liabilities determines a methodology to calculate Interest Rate Arbitrage for Lenders and Borrowers. The difference in rates of different maturities raises the issue of the best choice of maturity for lending or borrowing over a given time horizon. An upwards sloping yield curve means that the long rates are above short rates. In such a situation, the long term lender could think that the best solution is to lend immediately over the long term. The alternative choice would be to lend short term and renew the lending up to the horizon of the lender. The loan is rolled over at unknown rates, making the end result unknown. This basic problem requires more attention than the simple comparison between short term rates and long term rates.
We make the issue more explicit with the basic example of a lender whose horizon is 2 years. Either he lends straight for over 2 years, or he lends for 1 year and rolls the loan over after 1 year. The lender for 2 years has a fixed interest rate over the horizon, which is above the current 1 year rate. If he lends for 1 year, the first years revenue will be lower since the current spot rate for 1 year is lower than the 2 year rate. At the beginning of the second year, he reinvest at the prevailing rate. If the 1 year rate, 1 year from now, increases sufficiently, it is conceivable that the second choice beats the first. There is a minimum value of the yearly rate, 1 year from now, that will provide more revenue at the end of the 2-year horizon than the straight 2 year loan.
The same reasoning applies to a borrower. A borrower can borrow short term, even though he has a long term liquidity deficit because the short term rates are below the long term rates. Again, he will have to roll over the debt for another year after 1 year. The outcome depends on what happens to interest rates at the end of the first year. If the rates increase significantly, the short term borrower who rolls over the debt can have borrowing cost above those of a straight 2 year debt.
The two options differ with respect to interest rate risk and liquidity risk. Liquidity risk should be zero to have a pure interest rate risk. If the borrower needs the funds for 2 years, he should borrow for 2 years. There is still a choice to make since he can borrow with a floating or a fixed rate. The floating rate choice generates interest rate risk, but no liquidity risk. From a liquidity standpoint, short term transactions rolled over and long term floating rate transactions are equivalent ( with the same frequency of rollover and interest rate reset). The issue is to determine whether taking interest risk leads to an unexpected gain over the alternative solution of a straight 2 year transaction. The choice depends first on expectations. The short term lender hopes that interest rates will increase. The short term borrower hopes that they will decrease. Nevertheless, it is not sufficient that interest rates change in the expected direction to obtain a gain. It is also necessary that the rate variation be large enough, either upward or downward. There exist a break-even value of the future rate such that the succession of short term transactions, or a floating rate transaction, with the same frequency of resets as the rollover transaction- is equivalent to a long fixed transaction. The choice depends on whether the expected rates are above or below such break even rates. The breaks-even rate is the “ Forward Rate” It derives from the term structure of interest rates.
Risk Neutrality is conceptually the inverse of Risk & Return, it is a critical concept for arbitrage issues in corporate lending to the agricultural market. When playing heads and tails, we toss a coin. Let’s say we gain if we have heads and lose in the case we have tails. There is a 50% chance of winning or losing. The gain is 100 if we win and – 50 if we lose. The expected gain is 0.05 x 100 + 0.5 x (-50) = 25. A risk neutral player is, by definition indifferent. Between a certain outcome of 25 and this uncertain outcome. A risk-averse investor is not. He might prefer to hold 20 for sure than betting. The difference between 25 and 20 is the value of risk aversion. Since, investors are risk averse, we need to adjust expectations for risk aversion. For the sake of simplicity, arbitrage for the conservative non risk neutrality investor or institution is all about risk and return.
There are essentially two ways to print or create money. Debt, or Equity. Equity should be the preferred for any agricultural enterprise as it creates more value in the long run for all stakeholders, ranchers, and farmers. However, banks are in the business of lending and borrowing and lending agribusiness debt over and over and over until your credit ratings are jeopardized to the point where your cost of borrowing puts your business in a position where the bank will eventually own the business, through default.
First, you have to understand the more liabilities the bank has the more valuable it is for those who own it. A typical bank is owned by its common equity holders who garner all the residual value and earnings of the bank after paying the contractual obligations on deposits and subordinated debt. The first slice of value that equity owners of the bank lay claim to is the difference between assets and debt, also on the liability side, this slice referred to as the tangible equity or book value of the equity holders would receive if the bank assets are liquidated at fair market value and all debt is paid at par or parity.
Al larger book value of equity means a a smaller loss for depository and subordinated debt holders after liquidation hence, regulators to this as debt capital of the highest quality, the core tier 1 capital. Equity holders are also rewarded by all future earnings of the bank. The Net Present Value of the future earnings is the banks charter value, which is located on the bottom side of the asset side. Part of the earnings come from service income on deposits, but these are earnings before paying the insurance premium on insured deposits. Another part of the earnings is savings from corporate tax since the cost of debt are deductible from earnings for tax purposes., the flow of tax savings is incremental to all loans provided to borrowers, the dividend paid to equity holders is the difference between the asset cash flow and the after tax liability associated with deposits and subordinated debt, Since equity value depends on its dividend, it is affected by the liability structure. Simply put the more liabilities the bank has the more valuable its assets are, because having more liabilities allows federally regulated FDIC Insured Institutions to borrow more and more money from the Federal Reserve, making itself more money, however for the agricultural business everytime it borrows more and more funds from the bank its credit rating drops from A to C paper putting itself at risk of default and eventually allowing the bank to own the Agribusiness.
Yearly default rates are ratios of defaulted firms to surviving firms at the beginning of the year. There are arithmetic default rates and value weighted default rates. The default rates of a rating class and its volatility over time derive from these statistics. The default rates are close to zero for the best risk qualities. They increase to an average 8% a year for the lowest rating class. Actual values vary every year. The top three ratings characterize investment grade borrowers. The other three classes are speculative grade borrowers, it ranges from 0.2% to 8% a year.
We can observe the characteristic shape of average default rates of loans provided to agricultural businesses by commercial banks by detailed rating class, growing far more than the proportionally for the lowest ( riskiest) ratings. The increase in default rate when ratings decline has an exponential shape. The increase in default rate from one class to another changes drastically. In order to improve the rating by one grade, the required variation of default is around 6% for the last two classes of the scale. At the other end of the scale, a small decrease of 0.05% suffices to improve grade from Aa to Aaa. For the agricultural business with a Caa1-C rating, an analyst can observe clearly default rates are approximated at 12% to as high as 19% for a 12 month or 1 year loan.
All that AGRILEND does is essentially very simple.
Agrilend uses our partners from MERCOSUR to match funds contributed by FHLB interest free advance loans to fill in the gaps that banks cannot.
To accomplish this financing arrangement, an Agricultural Enterprise considering an equity, mezzanine, loan from Agrilend should expect to pay some cost for this structured finance arrangement in the form of purchasing Agrilend, Inc. stock agreements,environmental reports, and business valuations to name a few.
It is reasonable for the agricultural business to assume a cost upfront between $25,000 to as high as $250,000.00 depending on the deal size and or specific requirements.
You can see an example below:
Agrilend solves this problem by focusing on providing distressed agricultural business refinancing through a process of Recapitalization. Recapitalization is a type of corporate reorganization involving a substantial change to a company’s capital debt structure. Recapitalization maybe motivated by a number of reasons by farmers and food manufactures. Typically, the large part of equity is replaced with debt or vice versa. In more complicated transactions, mezzanine financing and other hybrid securities are involved. At Agrilend our expertise relies on Corporate Turnaround & Restructuring through Recapitalization, therefore refinancing the existing capital debt structure hereby positioning the farmer for expansion and growth by achieving profitability. This is achieved by reducing or eliminating the Total Debt Service and simultaneously increasing the Return On Capital. It is not an overnight process, however, done correctly you can see the widening margins between Total Debt Service and Return. On Capital exponentially increasing to 100% margins over a 10 year horizon, hereby allowing the once struggling agricultural farmer to improve efficiency and market share by having access to more capital to acquire incoming producing assets though growth through acquisition. If you need a Agriloan you come to the right place. We are not a FDIC chartered bank and chances are you will get the loan if you are looking for restructuring or your project involves CBD, Hemp, or Cannabis for medically approved applications, however not for recreational usage as Agrilend is against the usage of synthetic or controlled drugs. If you feel this is a project intended for your agricultural business, simply apply on our site on the contact us page and we will revert to you shortly. If approved your interest rate may be as low as 0 percent to as high as 3 percent. Go the contact us page and inquire if you want a agriloan with interest at 0 percent max 3 percent today. We cannot promise we will approve the project but it does not hurt to take a look.