Agricultural Lending
Managing Third Party Risks:
What You Don’t Know or
Didn’t Plan For Can Be Bad
ICBA 2014
Honolulu, Hawaii
Steven C. Turner
Baird Holm LLP
1500 Woodmen Tower
1700 Farnam Street
Omaha, NE 68102-2068
(402) 636-8256
© 2014 Baird Holm LLP
Baird Holm LLP
Baird Holm, LLP
("BH") represents agricultural lenders in the
structuring and documentation of agricultural and agri business loans,
as well as in the area of loan workouts, enforcement and bankruptcy
matters. Agricultural production loans have included among other,
cattle, hogs, dairy, poultry, eggs, grain, vineyards, vegetables, citrus,
tree fruit and nuts. Agribusiness loans have included among other,
grain companies, integrated hog operations, cattle feedlots, egg
producers and processors, cotton merchandising companies, various
food processors, vegetable and citrus packers, orange juice processors
and storage facilities, seed companies, flour mills, grocery stores, raisin
processors, wineries, vineyard development companies, animal
processing plants, animal genetic companies, animal feed companies,
chemical companies and ethanol plants.
BH also provides loan structuring, documentation and risk management
training programs custom designed for agricultural lenders.
© 2014 Baird Holm LLP
Managing Third Party Risks
Words on Paper
That’s the way we did it at my prior Bank
Is this really necessary?
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Managing Third Party Risks
Who?
What?
Why?
How?
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Managing Third Party Risks
The “Who”: Identify Third Parties
• Parties with Control or Possession of
Collateral
• Parties, including other Lenders, with
Claims to Collateral
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Managing Third Party Risks
• Parties with Contracts with the Borrower
• Loan Participants
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Managing Third Party Risks
The “What”: Identify Third Party’s
Interest and Risks
•
•
•
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Lien or Other Claim to the Collateral?
Contractual Claim?
Control over the Collateral?
Possession of the Collateral?
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Managing Third Party Risks
The “Why”: Why should I care?
Risks and interests impact:
• Borrower Operations
• Borrower Cash Flow/Debt Service
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Managing Third Party Risks
• Impair Lender Collateral
• Fraud Risk
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Managing Third Party Risks
The “How”: How Do I Manage/Control
Fraud, Third Party and Counterparty
Interests or Risks?
• Loan Structure
• Loan Documentation
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Managing Third Party Risks
Other Lenders
• Who: Identify other Lenders to your
Borrower
• What:
– Identify Interest in your Collateral
– Risks even if Other Loan is
Unsecured
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Managing Third Party Risks
• Why should you be concerned about
other Lenders?
– Repayment of Debt
– Enforcement of Lien on Collateral
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Managing Third Party Risks
• How Do I Mitigate the Risks of Other
Lenders?
– Subordination Agreement
“Bank hereby subordinates its debt and
security interest”
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Managing Third Party Risks
• Debt Subordination
Creditor subordinates all Indebtedness now or
at any time hereafter owing from Borrower to
Creditor ("Junior Debt") to all Indebtedness
now or at any time hereafter owing from
Borrower to Bank ("Senior Debt"). Creditor
irrevocably consents and directs that all Senior
Debt shall be paid in full in cash or other
immediately available funds prior to Borrower
making any payment on any Junior Debt,
except such payments as are expressly
permitted by this Agreement.
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Managing Third Party Risks
Creditor irrevocably consents and directs that all
Senior Debt shall be paid in full in cash or other
immediately available funds prior to Borrower
making any payment on any Junior Debt, except
such payments as are expressly permitted by
this Agreement.
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Managing Third Party Risks
• Collateral Subordination
Creditor further subordinates any security interest
it may have in the Collateral, (as defined in the
Borrower's Security Agreement) and any such
security interest of the Creditor in the Collateral is
and shall be deemed junior and inferior to the
security interest of the Bank in the Collateral,
regardless of the order of the filing of any UCC
financing statements or whether the Bank's
security is perfected or not.
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Managing Third Party Risks
As long as this Agreement is in effect, Creditor
will not take any action or initiate any proceedings
to enforce Creditor’s security interest.
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Managing Third Party Risks
• Collateral Subordination cont’d.
If any payment is made in violation of this
Agreement, Creditor shall promptly deliver the
same to Bank in the form received, with any
endorsement or assignment necessary for the
transfer of such payment or amounts setoff
from Creditor to Bank, to be either (in Bank's
sole discretion) held as cash collateral securing
the Senior Debt or applied in reduction of the
Senior Debt in such order as Bank shall
determine, and until so delivered, Creditor shall
hold such payment in trust for and on behalf of,
and as the property of, Bank.
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Managing Third Party Risks
• How Do I Mitigate the Risks of Other
Lenders?
– Intercreditor Agreements
• Consents
• Notices
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Managing Third Party Risks
• Collateral Issues
• Priority
• Enforcement Issues
• Access to Collateral
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Managing Third Party Risks
Statutory Claims or Liens
• Ag Liens
• Processor Liens
• Producer Liens
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Managing Third Party Risks
• Why should you be concerned about
statutory liens?
– Priority
– Enforcement of Lien on Collateral
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Managing Third Party Risks
Commodity Accounts
• Who holds the account?
• What interest does that person have in the
account?
• How?
– Control Agreement
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Managing Third Party Risks
Standard Broker Form Control Agreement Provisions
As additional security for the obligations of the Debtor to the Secured
Party, and for the payment of all monies which the Secured Party
may hereafter loan or advance to the Debtor, the Debtor hereby
grants a security interest in and assigns and transfers to the Secured
Party all hedging funds which may hereafter accumulate or become
withdrawable from or paid out of the hedging account of the Debtor
with the Broker, including any balance which may remain to the
credit of said account upon the closing thereof; subject, however, to
the prior payment of all indebtedness of the Debtor to the
Broker, as such may exist from time to time, including fees and
commissions, which may have been incurred in connection with
Debtor's transactions with Broker, and to Broker's lien, and the
right of foreclosure thereof in connection with any indebtedness
of Debtor to Broker (including any right of Broker to close out open
positions without prior demand for additional margin and without prior
notice).
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Managing Third Party Risks
If, at any time during the continuance of any
futures contract or contracts in the Account,
the Broker may require additional margin with
respect to such contract or contracts, the
Secured Party will promptly advance to
the Broker on behalf of the Debtor such
amounts as may be requested by the Broker
or enter appropriate liquidating orders…
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Managing Third Party Risks
• Commodity Broker
• Fraud/Insolvency
• Minimize Cash or Assets Left or Deposited
with Broker
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Managing Third Party Risks
Landlords
– Leased Real Estate
– Pasture
– Feedlots
– Storage Facilities
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Managing Third Party Risks
• What Rights do you have, as the
Lender, to Access the Property and
your Collateral?
• How to Mitigate the Risk:
– Collateral Assignment of the Lease
– Access Agreement
– Landlord Consent
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Managing Third Party Risks
Access Agreement – Key Provisions
LESSOR REPRESENTATIONS.
Lessor agrees and
represents to the Bank that there is no breach or offset existing
under the Lease or under any other agreement between
Lessor and Borrower. Lessor agrees not to terminate the
Lease, despite any default by Borrower, without giving the
Bank written notice of the default and an opportunity to cure
the default within a period of sixty (60) days from the receipt of
any notice. If the default is one that cannot reasonably be
cured by the Bank (such as insolvency, bankruptcy, or other
judicial proceedings against the Borrower), then Lessor will not
terminate the Lease so long as any Collateral remains on the
Premises.
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Managing Third Party Risks
DISCLAIMER OF INTEREST.
Lessor hereby
disclaims all interest, liens and claims which Lessor
now has or may hereafter acquire in the Collateral.
Lessor agrees notwithstanding the disclaimer, that
any interest, lien or claim that it may now have or may
hereafter have in the Collateral will be junior and
inferior to the security interest of the Bank and will be
subject at all times to the Bank's security interest (or
other present or future interest) in the Collateral.
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Managing Third Party Risks
ENTRY ONTO PREMISES. Lessor grants to the
Bank the right to enter upon the Premises for the
purpose of inspecting the Collateral, caring for the
Collateral, removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises
for such period of time as the Bank deems
reasonable and necessary. In such event, the Bank
will have no liability to the Lessor, including without
limitation, any obligation to pay rent or other
compensation.
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Managing Third Party Risks
• Grain Companies
– Warehouse Receipts
• Perfection by Filing UCC Financing
Statement on Grain
• Perfection by Control of Negotiable
Warehouse Receipts
– Electronic Warehouse Receipts
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Managing Third Party Risks
• Grain Company Liquidation
• State Indemnity Funds
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Managing Third Party Risks
Feedlot Fraud
Feedlots have traditionally created opportunities
for fraud and other risks which may impair the
Bank’s loan and/or collateral. Feedlots should
be subject to a high level of scrutiny, inspection
and collateral control.
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Managing Third Party Risks
• Collateral Inspection
• Brands
• Review and Inspection of Feedlot Checking
Accounts
• Review Feedlot Internal Controls and
Processes
• Financing of Cattle not located at Feedlot
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Managing Third Party Risks
• Multiple Sale/Financing of Livestock
• Other Types of Agreements:
– Joint Ventures
– Shared Ownership
– Insider/Related Party Transactions
– Marketing Agreements
– Guaranteed Cost of Gain/Profit
• Ponzi Schemes
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Managing Third Party Risks
Third Parties With Contractual Claims
– Purchasers of the Collateral
– Marketing Agreements
– Production Contracts
– Forward Contracts
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Managing Third Party Risks
• How Can I Protect My Bank’s Interest?
– Due Diligence on the Counterparty
– Collateral Assignment of the Contracts
– Control of Collateral Proceeds
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Managing Third Party Risks
• Notification of Security Interest in Farm
Products
• Dairy Assignments
• EFS Filings
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Managing Third Party Risks
Water
• Who Controls the Water Supply?
• What?
– Available Water Supply
– Access to Water
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Managing Third Party Risks
How?
– Water Due Diligence
• Required Amounts
• Sources of Water
• Security Interest in Water
“Rights”/“Allocations”
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Managing Third Party Risks
Governmental Entities
• What?
– Permits Necessary for Operations
– Environmental Regulations
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Managing Third Party Risks
Governmental/Environmental
– How?
• Determine and Verify Permits
• Environmental Reports/Investigations
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Managing Third Party Risks
• Syndicated Loans/Participation Agreements
• Originating Banks
– Duties
– Indemnification
– No Representations and Warranties
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Managing Third Party Risks
• Participants
• Voting Rights
• Multiple Participants
• Default by Lead Bank
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Managing Third Party Risks
• Standard Forms/Participation Agreements
• Participation Agreement must reflect the
Deal
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