Government statement of its rural policy

Press, 3 July 1986, Page 15

Government statement of its rural policy

As part of its contribution towards restructuring farm debt, the Government has instructed the Rural Bank to offer, a discount scheme to its borrowers. The scheme is intended only for farmers with Rural Bank concessional loans who are in financial difficulty and are unable to meet all their debt servicing obligations. It will encourage farmers to get on with debt restructuring and, at the same time, help place the Rural Bank portfolio on a more commercial basis. An alternative scheme has been developed for farmers who are primarily financed by lenders other than the Rural Bank. This is explained in a later section, headed “Conditional seasonal finance guarantee scheme.” The Rural Bank discount scheme is conditional on other creditors reaching a binding agreement with the farmer to restructure the farm debt so the property is a viable business again. It is intended that the Rural Bank discount scheme, and the increased equity which it gives farmers, will trigger favourable conditions to raise seasonal finance. Discounting of loans is a process where the amount owing on the Rural Bank loan is reduced by an amount that depends on the number of years the loan still has to run, and the rate of interest payable. Discounting has the immediate effect of reducing a typical borrower’s debt to the Rural Bank by about 20 to 25 per cent. As part of this discounting process the concessional rate of interest is increased to the Rural Bank’s current commercial rate for this type of lending. Initially the interest rate will rise to 17.5 per cent per annum. This means a farmer who elects to take advantage of this offer will have increased equity, will pay commercial interest rates but will maintain the same level of annual payments. In practical terms this increases the security of loans which rank after Rural Bank loans. By itself, however, the discounting process is not a “stand alone” solution to the problems which many farmers face as it does not affect the farmer’s cash flow. To resolve problems such as the inability to meet debt repayments

and/or to raise seasonal finance other lenders will have to take their part in the process of returning the farm to viability. The discount offer, however, makes this participaton by other lenders a more attractive alternative to other forms of action to recover their investment. Those farmers whose financial situation is not serious will continue with their present arrangements. As has already been announced, their concessional rates of interest will increase by 1 per cent a year to the Rural Bank’s commercial rate for similar lending.

Farmers who borrowed from the Land Settlement Board, who have financial problems similar to those described above will have those problems with that debt dealt with by negotiation with the board. If they are also Rural Bank clients, they will be eligible for the discount offer. Farmers with loans taken out through the Department of Maori Affairs will also be eligible for the discount scheme. To take advantage of the Rural Bank offer, farmers and their creditors will have to discuss what heeds to be done to make the farm business viable again. The Rural Bank will want to be satisfied that any restructuring proposals resulting from discussions between farmers and their creditors are likely to create a viable farming business. The farmer must also show that all reasonable Steps are being taken to improve the financial situation of the farm. The bank will require any restructuring proposal to be supported by budgets showing the likely outcome over the next two seasons. The budgets should be able to show expected gross income capable of meeting farm working expenditure at an appropriate level, an acceptable level of personal drawings, and debt servicing payments on the agreed restructuring hosts Expected 1986-87 farmgate prices will be used in determining gross income. Analysis of world price trends beyond this time does not encourage assumptions of improved price prospects within the next two to three years. Expected farm production levels should be based on the performance of the existing management. It will also be important for the farmer and his or

An abridged version of the “Guide to 1986 Rural Policy Measures” booklet being distributed to farmers and others by mail in the next few days appears on this page. The guide was itself a condensed version of the Government Statement of Rural Policy tabled in Parliament yesterday. Reprinted here are the sections on Rural Bank and commercial lending options and the Government assistance to people in rural areas.

her creditors to’ consider what benefit any additional inputs of farm management expertise from an adviser could play in helping to ensure the viability of the farm business. Viability is concerned with the ongoing profitability of the farm as a business. This means farm working expenditure should be adequate to maintain the farm operation including necessary machinery replacement Any budgets will need to match costs with income on a sustained basis. Allowance should be made, however, for any changes to farm working expenditure as a result of more efficient management. The category of borrower to whom the conditional offer of discounting will apply, is those who are unable to meet their debt servicing obligations. To take advantage of the offer, farmers will have to satisfy the Rural Bank that they have rationalised their on and off-farm assets, and disposed of assets not essential for the operation of the farm business. The farmer and his or her creditors will have to enter into a binding deed of arrangement recording the restructuring. The Rural Bank will need to be satisfied that, on the basis of those arrangements, seasonal finance is available. A farmer will have the right to refer a restructuring rejection to a Rural Bank Appeal Committee which will apply the same criteria in reviewing the decision to reject the proposal. The key challenge lenders will face in restructuring farm debt is how to minimise their own losses whilst adjusting the farmer’s debt servicing commitments so they can be met within current income. A wide range of options already exists, including adjusting the terms of the mortgage through: ® Reducing the amount of interest payable. ® Suspending interest payment (interest holidays).

• Capitalising interest into the principal. • Postponing principal repayments. • Writing off part or all of outstanding principal. • Converting conventional mortgage debt into an indexed mortgage. Equity participation through: • Sale and leaseback (the farmer sells all or part of the farm to an investor, possibly a mortgagee, who leases it back to the farmer). x • Share farming (parties decide ownership of stock and plant and the sharing of farm working expenses and income). • Management (farmer is employed as manager, and may have the right to buy farm under defined conditions). • Partnership (the farmer sells his farm to a syndicate of which he is managing partner). Management rationalisation through, for example: • Machinery syndication or sharing. • Co-operative purchasing of farm inputs. • Labour sharing (e.g. shearing). • Improving farm operating efficiency. • Co-operative farming ventures (without necessarily changing ownership). Conditional seasonal finance guarantee scheme Most farmers have no big problems in getting seasonal finance. However, there are a number who will. Some of them may find they cannot get seaonal finance until their debt restructuring has been completed. To help overcome these problems, the Rural Bank will put in place a conditional seasonal finance guarantee scheme for those farmers whose debts need restructuring and for whom the Ruural Bank is not a major creditor. Eligibility for the seasonal guarantee is open to those farmers whose Rural Bank interest bearing debt is less than 50 per cent of their total interest bearing debt as at June 30, 1986. Under the scheme, the following conditions apply: 1. — Fifty per cent of the

risk of lending the seasonal finance will be borne by the Rural Bank and 50 per cent by other creditors, of Which at least 20 per cent must be borne by the sea-, sonal financier. 2. — The guarantee will be to repay seasonal finance advances for 198687. 3. — The maximum amount eligible for guarantee will be the lesser of the farmer’s forecast deficit or 25 per cent of projected gross farm income, in each case as shown in a budget for the 1986-87 season acceptable to the Rural Bank. 4. — There will be a requirement that, before a guarantee is given, the farmer and his creditors have had a first meeting with a view towards restructuring the farmer’s debt. 5. — A certificate will be required from the farmer's accountant, or other acceptable professional advisor, saying that in the advisor’s view there are reasonable prospects that the fanner and his creditors will reach agreement on a restructuring.

get, and submit it to the Rural Bank through the seasonal financier who will be administering it Special settlers on budgetary control witn the Rural Bank Specific measures will be needed to deal with the problems of "special settlers” who have been settled by the Rural Bank at unusually low equity/ debt ratios such as 15/85 per cent Special settler ffarmers will be entitled to the discount offer detailed above. The Rural Bank at its discretion may additonally offer a range of options including further debt write-down of principal exceeding current market value, taking an equity interest in order to restore viability, or conversion of debt into any form of instrument which would promote viability. In choosing the appropriate instrument the Bank would be required to seek the best commercial return available. Land settlement board loans Farmers who borrowed from the Land Settlement Board, who have financial problems similar to those already described, will have those problems dealt with by negotiations with the Board. If they are also Rural Bank clients, they will be eligible for the discount offer.

6. — There must be an agreement to mortgage given by the farmer in favour of the Rural Bank and the other guarantor(s) agreeing to give an "on demand” mortgage over his property in favour of those parties for any balance actually paid out after June 30, 1987. 7. — Any restructuring will be expected to automatically take care of seasonal finance needs, so that either there would be no balance due at June 30, 1987 or it will be repaid immediately restructuring was completed. 8. — The guarantee will apply to the extent that available income (including non-farming income) falls short of the amount needed to meet essential farm operating costs, personal drawings and interest. 9. — Personal drawings will be limited to $BOOO per farming household, being fixed in relation to levels used for other budgeting purposes by the Rural Bank. Where local schooling is not available, boarding school fees will be allowed. Family Care payments would be allowed in addition to the above. 10. — Capital expenditure except for replacement of non-operable essential vehicles or plant will however be excluded. 11. — The guarantee will not cover the repayment of any loan principal. 12. — The farmer will be required to exercise restraint in all operating costs, but the application of maintenance fertiliser will be accepted. The Rural Bank will charge a fee of $250 for each guarantee. Applicants will be required to complete a bud-