© 2012 Baird Holm LLP Agricultural Lending Counterparty/Third Party Risks: What You Don’t Know or...

© 2012 Baird Holm LLP

Agricultural LendingCounterparty/Third Party Risks:

What You Don’t Know or Didn’t Plan For Can Be Bad

Jacqueline PueppkeICBA Annual Conference

Nashville, Tennessee


Who?

What?

Why?

How?

Counterparty/Third Party Risks


The “Who”: Identify Third Parties andCounterparties

• Other Lienholders

• Parties with Control or Possession of Collateral

• Parties with Claims to Collateral



• Governmental Entities

• Other

– Letters of Credit Beneficiaries

– Subordinated Debt

– Loan Participants

– Commodity Brokers



The “What”: Identify Third Party’s

Interest and Risks

• Lien?

• Contractual obligation?

• Control over the collateral?



The “Why”: Why should I care?Risks and interests impact:

• Borrower Operations

• Borrower Cash Flow/Debt Service

• Lender Loan Enforcement

• Lender Collateral



The “How”: How Do I Manage/Control Third Party and Counterparty Interests or Risks?

• Loan Structure

• Loan Documentation



Other Lenders

• Who: Identify other lenders to your borrower

• What: – Identify interest in your collateral– Risks even if loan is unsecured



• Why should you be concerned about other lenders?

– Repayment of Debt

– Enforcement of Lien on Collateral



• How Do I Mitigate the Risks of Other Lenders?

– Control Agreement for Deposit Accounts

– Subordination Agreement• Debt Subordination• Collateral Subordination



• How Do I Mitigate the Risks of Other Lenders?

– Intercreditor Agreements• Consents• Notices• Collateral issues• Priority• Enforcement issues• Access to Collateral



Statutory Claims or Liens

• Who: Identify third parties who may have statutory liens on the collateral

• What: Identify the statutory liens– Ag Liens– Processor Liens– Producer Liens



• Why should you be concerned about statutory liens?

– Priority

– Enforcement of Lien on Collateral



Commodity Accounts

• Who holds the account?

• What interest does that person have in the account?

• How?

– Control Agreement



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).



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…



Landlords

• Where: Location of collateral?

– Leased Real Estate– Pasture– Feedlots– Storage Facilities



• Who owns the property where the collateral is located?

• What rights do you have, as the lender, to access that property?

• How to mitigate the risk:– Collateral Assignment of the Lease– Access Agreement– Landlord Consent



Case Study:

The Cheese Manufacturing Plant



Third Parties with ContractualObligations

• Who?

– Milk Supplier

– Cheese Buyer

• Why should I be concerned?



• How Can I Protect My Bank’s Interest?

– Due Diligence on the counterparty

– Collateral Assignment of the contracts



Third Parties With ContractualObligations

• Examples of Other Contractual Obligations:

– Marketing Agreements

– US Government Contracts – Assignment of Claims Act

– Construction Contracts



Tenants

• Who are the tenants?

• What?

– Portion of property occupied?

– Terms of the Lease?

• Why?

– Does tenant’s lease hurt your ability to re-sell the property after foreclosure?



Cheese Manufacturing Plant

Whey Equipment and Leased Area



Tenants

• How?

– Subordination Agreement

– Subordination, Nondisturbance and Attornment Agreement



Title Insurance

• Carefully review the list of specific exceptions– Covenants?– Restrictions?– Easements?– Leases?



• Title Defects– Title defect exists if a third party claims an interest which

interferes with the insured’s use of the property– Examples of defects:

• Property transferred through probate and transfer deed was not executed by all heirs;

• improperly acknowledged real estate transfer documents;

• conveyances by minors or incompetents; or• conveyances by one spouse where the

acknowledgment and consent of both spouses was required.



• How to Handle Title Defects (cont.)– Deal with any issues at the

commitment/preliminary report or pro forma policy stage

– If issue comes to your attention after issuance of policy – you need to provide notice immediately to the title company at the address set out in the policy (not the address of the local title agent)



Water

• Who Controls the Water Supply?

• What?– Available Water Supply– Access to Water



How?– Water Due Diligence

• Required Amounts

• Sources of Water

• Security Interest in Water “Rights”/“Allocations”



Governmental Entities

• What?

– Permits Necessary for Operations

– Environmental



Governmental Regulatory/Permit• Dairy Example

– Permits• Operating Permit

– Producing market milk• Separate permits needed for processing or

distributing milk; bulk milk hauler tanker; and bulk milk tank sanitizer

• NPDES Permit for wastewater discharge– Application requires nutrient management plan

and annual reporting• Air Quality Permit



• Dairy Farms (cont.)– Federal CAFO Regulations

• Nutrient management plan• Manure application rate limitations• Soil sampling• Equipment and operation inspections• Setback requirements• Limitations on wastewater discharge • Depth marker

– Sanitary Regulations• Inspection by state agencies (failure to pass inspection may

result in restriction of operating permit or exclusion of milk)



Governmental/Environmental

– How?• Determine and Verify Permits

• Environmental Reports/Investigations

• Assignment of Permits?



Participation Agreements/Syndicated

Loan Documents

• Lead Banks

– Rights/Obligations

• Participants

– Rights/Obligations



Letters of Credit

• Reimbursement Agreement/Obligation

• Terms of the Letter of Credit

• Collateral for Letter of Credit


© 2012 Baird Holm LLP Agricultural Lending Counterparty/Third Party Risks: What You Don’t Know or...

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