Posted 1/24/2023 15:18 (#10057349) Subject: Real World/Real life Financials Course 102
Lots of great observations and comments from the original thread.
Of course the deal is done because you know if you don't the other guy will do it and you lose a customer for a generation or longer.
Five years later let's take a look and see what's happened.
Accrual earnings in the five years after the purchase are -$111,000/yr. (lost money 4 out of the 5 years)
Repayment capacity (Interest and Depr added back in ) +$368,000/yr ( at least its not a negative repayment capacity)
Debt payments are now $474,000
Debt Coverage ratio is .78:1 (has .78 for every $1.00 worth of payments)
Working capital is -$600,000
What were the warnings signs at the time of the purchase?
Repayment capacity both historical and projected were adequate to service the projected debt. (but they failed to take into consideration where they were in terms of historical returns in Agriculture. IE were they at the top end of the boom and bust cycle we see in agriculture. In other words what was the likelyhood of the being able to repeat the earnings given the cyclical nature of agriculture. We are going to be faced with that very thing now with the excellent returns we've had since 2020 (its now 3 years of good returns) How likely is it that we continue to see cash returns in excess of $600/ac for a typical corn and Soybean operation ? its a question no one likes to answer.
Working capital. Several mentioned this as a potential issue and in the end the working Captial dissappeared by the end of the 2nd year.
Overall debt payment on a per acre basis, several mentioned this as an issue of replacing what would have been a cash rent of $300 with a land payment that exceeds $600/ac. (this is my argument as well. Have never seen a land payment of $600 per acre workout well) (sometimes is simple basic issues that get missed the most often)
Several wanted to know when in time this was as if they had perfect insight as to what is going to happen going forward. We all wish for that but that is never possible is it.
So the next question is what do you do now?
Working capital is a negative $600,000 land values have drifted lower but no dramatic decline yet.
There is some equity left in the land base but its going to push you close to 100% loan/value if your honest with the actual land value. and this just barely gets the working capital to zero.
Already has too much in terms of loan payments relative to the past five years worth of historcial earnings/repayment ability.
Your not going to be able to show a postive repayment margin based upon his most recent past history. Of course the projections will work, they always work. Reality has a way of laughing at projections.
Has not missed any term loan payments because your not forcing him to pay out the crop note each year.
your regulators are not going to allow you to keep rolling the negative working capital forward so there needs to be a real plan of action to deal with the negative working capital and lack of repayment capacity vs the debt payments.
Has historically been what you would consider a low cost operator IE his operating expenses as a percentage of gross sales is about 70% even with the cash rents being what you would consider at the upper end of the range in the area.
Good production skills; yields are slightly above avg for the area, okay marketing skills.
There of course are a lot of little details that would make or break this but assume that those little details are captured by the big picture broad brush strokes outlined above.
Whats the plan of action? big picture concepts do not worry about details here.