Side-stepping the credit crunch

What is the credit crunch?

The credit crunch is a sudden drop in the availability of loans, with a sharp increase in the cost of borrowing. It was preceded by excessive and imprudent lending to potentially risky borrowers in the USA and UK, including 100% mortgages and unsecured loans.

As the number of people defaulting on repayments rose, lenders’ attitudes to risk abruptly changed, sparking a crisis in the global financial markets, with many banks withdrawing lending and bumping up their interest rates.

Although the Bank of England and other international banks have cut base rates to soften the blow of falling house prices and tighter credit, this has not filtered through to high street rates, says Carmen Suarez, chief economist at the NFU. This is due to the higher costs of borrowing between banks, based on the London Interbank Offered Rate (LIBOR), not the Bank of England base rate. “Banks are going to be much more careful about who they lend to,” she says.

What impact is this having on poultry farmers and the farming industry?

Farming is one of the safest industries to lend to, as producers have a huge asset base on which to secure their borrowings. “The sector is generally very safe,” says Steve Ellwood, agriculture director at HSBC. “The likelihood of producers facing withdrawal of loans is infinitesimal.”

But businesses seeking to secure new finance, to comply with the cage ban, or fund expansion, for example, are likely to find it more difficult than in recent years. “Terms will vary depending on an individual’s track record,” says Mr Ellwood. “While balance sheets are important, so is track record and profitability.”

Pat Tomlinson, head of agriculture at Barclays, agrees. “If you represent a high risk to a bank you might find it harder to get credit, or it will become more expensive.”

Tenant farmers are particularly likely to face difficulties, warns George Dunn of the Tenant Farmers’ Association. “It is beginning to concern us that the availability of credit, both in the short and long term, is going to cause us severe problems.”

What can you do to improve your chances of getting a loan?

A well-thought-out business plan is the key to getting any loan approved, says Jon Drew, an agricultural business manager at Lloyds TSB. “The numbers clearly need to stack up.” Applicants should seek advice from consultants, accountants and industry experts, to ensure that all aspects of the proposal have been properly considered.

“It’s been a roller coaster ride for the poultry sector over the past 18 months, with currency changes and feed cost rises,” says Mr Drew. It is, therefore, essential that applicants display an understanding of the market volatility, use the latest figures, and include sensitivities in their business plan to allow for changes in scenario.

“When times are turbulent planning becomes even more important. There are many things beyond the farm gate that you can’t control, and you need to be mindful of the implications of that.”

Other tips

Producers should minimise their exposure to risk by making use of forward contracts when buying or selling. They also need to restructure debt into long-term borrowing and short-term working capital so they can react quickly in a changing market.

When choosing a bank, ensure it understands the agricultural sector, has local and accessible managers, and has a strong credit rating, says Peter Sobey, head of agriculture at Lloyds TSB. Also, ask whether it lends based on the Bank of England base rate, or the currently higher LIBOR rate.

What does the future hold?

The Bank of England is facing conflicting pressures on interest rates lowering them should soften the impact of the credit crunch on house prices, but increasing them may be necessary to control inflation. It is, therefore, difficult to predict how far rates will continue to fall, or when the credit crunch will lift, says Mr Sobey.

“There’s no doubt that we will see our way out of this, but we could be in for more turbulence over the next few months.” However, interest rates are historically very low, and borrowers can opt for variable, fixed, or capped rate loans according to their attitude to risk, he adds.