Agri Credit Clinic. New Entrants Work-Shop. Moorepark 25 th April Bank of Ireland is regulated by the Central Bank of Ireland

Transcription

1 Agri Credit Clinic New Entrants Work-Shop Moorepark 25 th April 2013 Bank of Ireland is regulated by the Central Bank of Ireland

2 Pillars of the credit application process Pillar 1 The Foundation Business Plan Pillar 2 The Build The Application The Financials Repayment Capacity The Security Pillar 3 The Handover The Decision Appeals Process 2

3 Pillar 1. The Foundation

4 Pillar 1: Business Plan Business Plan: The purpose of a business plan is to: Establish the fundamental viability of the project, e.g. Land purchase, farm development proposal. Document a plan for the farm, outline medium and long term objectives Act as a yardstick for measuring progress Communicate plans for the business to outsiders, e.g. your bank manager. A business plan summarises the following points about any business: Where it has come from / Where is it now / Where is it going in the future How it intends to get there How much money it needs to fulfil its plans What makes it likely to succeed What threats or disadvantages must be overcome on the way The ability of the promoter (farmer) to implement and deliver the plan 4

5 Pillar 1: Business Plan What Constitutes a Good Plan? Business Plan should contain the following sections: Background and description of the farm Management and organisation; (who does what on the farm) Operations plan (what needs to happen and who will make it happen) Financial plan (cash flow / project budget) Points to note: Business plans need to be realistic neither overly optimistic nor complicated What If?.Sensitivity Analysis and Plan B 5

6 Pillar 2. The Build

7 Pillar 2 : Assessing the credit application Farmer & Purpose of loan facility proposed? Background, experience, skillset of farmer What is the purpose of the facility? How much is required? For how long is the facility required? Owners Input? What asset is being financed? What type of repayment schedule is required (important to match repayments to farm cash flow) What are the main sources of repayments? Is the facility secured on the asset being financed? Market Assumptions Based on Business Plan 7

8 Pillar 2: Supporting the credit application Financial information required by the Bank & why: Up to date Farm accounts (multiple years are preferable) May not be available for new entrants Management accounts / Profit Monitors (if available) Bank statements (if new to bank customers) Confirmation of direct payments (SFP, REPS, DAP, etc.) Confirmation of off farm income & tax affairs Projections (especially where future cash flow will differ dramatically from historic norms) Particularly relevant for new entrants. Information requested to make the right decision for the bank and the customer 8

9 Pillar 2: Farm Accounts: Profit and Loss The profit and loss account shows how much profit (or loss) the farm made in a given period (usually a year) The Components of the P/L Account are: Turnover 250, ,000 Cost of Sales 150, ,000 Gross Profit 100, ,000 Expenses 77,000 90,000 Profit before tax 23,000 20,000 Tax 3,000 2,600 Profit after tax 20,000 17,400 Use Profit & Loss Statement and look out for: Turnover trends Gross Profit & Net Profit trends (significant variances need to be explained) Expenses (any once off expenses) 9

10 Pillar 2: Cashflow Analysis Cashflow analysis: It is used to report the cash generated and used by a farm / business during a specified period Cashflow is the life blood of any business or farm and many cases of business failures have been as a result of running out of cash Profitability does not always mean liquidity as cash can be absorbed by: Working Capital (as above) and/or Capital Expenditure and/or Excessive Drawings/Dividends Weather and feed cost factors have impacted farm cash flow in 2012 /

11 Pillar 2: Projections Experience shows that projections are overly optimistic Are the turnover figures and margins based on past performance? Are the projections a best or worst case scenario? Are the assumptions realistic and based on solid research? Do financials provided back up previous projections? Is the breakeven level known? Does the information provided indicate ability to repay existing and proposed debt? 11

12 Pillar 2: Establishing Repayment Capacity Primary focus when analysing financial statements is to establish the level of risk attaching to existing or proposed borrowings, but more particularly, to estimate if repayment capacity exists at present and is likely to exist throughout the period of the borrowings Cannot rely solely on historical figures (particularly for new entrants to dairying) so must forecast what some key figures will look like in the future What we are really assessing is the farm s ability to service the debt and be able to continually do so Stress testing - rationale? Reflects the robustness of an entity s repayment capacity against future increases in interest rates 12

13 Pillar 2: Repayment Capacity Calculation. Profit before Tax 45,000 Plus: + Depreciation 6,000 + Lease Interest Payments (from P & L) 2,000 + Bank Interest 4,000 + Non Recurring Expenses 10,000 Less: 67,000 - Non Recurring Income - - Less Grant Amortisation - = Cash generated 67,000 Less: - Total Loan Repayments (current & proposed) 12,000 - Overdraft/Stocking term loan interest 2,000 - Leasing Payments (for the coming year) 10,000 - Tax 8,000 - Drawings (NB does the drawings figure include tax) 20,000 Funds available after servicing all debts 15, Amount ( )

14 Repayment Capacity (contd.) Repayment capacity is the key lending consideration: Historical Projected CASH IN Enterprise income (dairy, beef, cereals, etc) Single Farm Payment, area based compensation, etc. Non farm income (PAYE typically) CASH OUT Drawings (including taxation) Existing farm loan repayments Existing home loan / personal loan repayments Proposed new loan repayments CASH IN > CASH OUT FOR LOAN APPROVAL

15 Pillar 2: Security Bank takes security to mitigate risk but the most important question is whether the customer can repay the loan Level of security dependent upon: Extent of the exposure Type of facility provided Term of facility Borrower s own cash input Bank s evaluation of the level of risk involved 15

16 Pillar 2: Security Main Security Types in Farming: Life Policy Lien on Deposits Land Fixed Legal Charge (most common farm lending security) Asset as Security e.g. leasing Personal Letters of Guarantee for Ltd Co debt owners commitment Debentures Floating & Fixed 16

17 Pillar 3. The Handover

18 Pillar 3: The Decision & Appeals Process We aim to have a decision within 3 working days of an application: Dependent on complexity of application and when all required information is received. If you are unhappy with the decision you can ask for the application to be reviewed by a Senior Underwriter (internal appeals process) If the decline decision is sustained you should receive a decline letter with reasons and are informed of your right to contact the Credit Review Office The Credit Review Office has been established to offer independent advice and arbitration to borrowers who have had their request for credit turned down by a bank. See for eligibility criteria. 18

19 2012 / 2013 farm cash flow We recognise the additional costs in the system during 2012 and Spring Additional volumes of feed required. + Higher price per tonne = HIGHER WORKING CAPITAL REQUIREMENT. Cash flow squeeze now. Happy to support cash flow where overall operation is viable

20 Current Account Balance Current Account Impact Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Month Overdraft Limit Average Year 2012/2013

21 Answer the W s Who / What needs to be paid? When does payment need to be made? What impact will this have on my current account? Will I need additional funding/extension of overdraft limits, etc?

22 Conclusions Bank of Ireland optimism for agri sector; volatility will play a role. Long term commitment means a Long term view. Extensive nationwide branch network. Capital & appetite to support the development of the agri. Sector. 22

23 Thank You Questions :