Presentation Transcript

1. Agricultural LendingManaging 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
2. 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.
3. Managing Third Party Risks Words on Paper That’s the way we did it at my prior Bank Is this really necessary?
4. Managing Third Party Risks Who? What? Why? How?
5. Managing Third Party Risks The “Who”: Identify Third Parties Parties with Control or Possession of Collateral Parties, including other Lenders, with Claims to Collateral
6. Managing Third Party Risks Parties with Contracts with the Borrower Loan Participants
7. Managing Third Party Risks The “What”: Identify Third Party’s Interest and Risks Lien or Other Claim to the Collateral? Contractual Claim? Control over the Collateral? Possession of the Collateral?
8. Managing Third Party Risks The “Why”: Why should I care? Risks and interests impact: Borrower Operations Borrower Cash Flow/Debt Service
9. Managing Third Party Risks Impair Lender Collateral Fraud Risk
10. Managing Third Party Risks The “How”: How Do I Manage/Control Fraud, Third Party and Counterparty Interests or Risks? Loan Structure Loan Documentation
11. 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
12. Managing Third Party Risks Why should you be concerned about other Lenders? Repayment of Debt Enforcement of Lien on Collateral
13. Managing Third Party Risks How Do I Mitigate the Risks of Other Lenders? Subordination Agreement “Bank hereby subordinates its debt and security interest”
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. Managing Third Party Risks How Do I Mitigate the Risks of Other Lenders? Intercreditor Agreements Consents Notices
20. Managing Third Party Risks Collateral Issues Priority Enforcement Issues Access to Collateral
21. Managing Third Party Risks Statutory Claims or Liens Ag Liens Processor Liens Producer Liens
22. Managing Third Party Risks Why should you be concerned about statutory liens? Priority Enforcement of Lien on Collateral
23. Managing Third Party Risks Commodity Accounts Who holds the account? What interest does that person have in the account? How? Control Agreement
24. 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).
25. 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…
26. Managing Third Party Risks Commodity Broker Fraud/Insolvency Minimize Cash or Assets Left or Deposited with Broker
27. Managing Third Party Risks Landlords Leased Real Estate Pasture Feedlots Storage Facilities
28. 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
29. 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.
30. 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.
31. 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.
32. 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
33. Managing Third Party Risks Grain Company Liquidation State Indemnity Funds
34. 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.
35. 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
36. 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
37. Managing Third Party Risks Third Parties With Contractual Claims Purchasers of the Collateral Marketing Agreements Production Contracts Forward Contracts
38. 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
39. Managing Third Party Risks Notification of Security Interest in Farm Products Dairy Assignments EFS Filings
40. Managing Third Party Risks Water Who Controls the Water Supply? What? Available Water Supply Access to Water
41. Managing Third Party Risks How? Water Due Diligence Required Amounts Sources of Water Security Interest in Water “Rights”/“Allocations”
42. Managing Third Party Risks Governmental Entities What? Permits Necessary for Operations Environmental Regulations
43. Managing Third Party Risks Governmental/Environmental How? Determine and Verify Permits Environmental Reports/Investigations
44. Managing Third Party Risks Syndicated Loans/Participation Agreements Originating Banks Duties Indemnification No Representations and Warranties
45. Managing Third Party Risks Participants Voting Rights Multiple Participants Default by Lead Bank
46. Managing Third Party Risks Standard Forms/Participation Agreements Participation Agreement must reflect the Deal