Agribusiness Bankruptcies, Failures and Fraud –
BFF’s?
Karen Boyer U.S. Bank National Association
Mike Stewart Faegre Baker Daniels
Randy Humphreys Glenwood Management, LLC
Breia Schleuss, Moderator Faegre Baker Daniels
Agribusiness Bankruptcies, Failures and Fraud – BFF’s?
Agribusiness BFF: Recent Examples
► AgFeed Industries ► Anderson Seed ► Aurora Foods ► Austin Packaging ► Cascade Grain Products ► Choice Genetics ► C&K Market ► Eastern Livestock ► Fresh & Easy ► Gateway Ethanol ► Grabanski Grain ► Groeb Farms ► Hawkeye Renewables ► Hereford Biofuels ► Hostess
► International Garden Products ► Interstate Bakeries ► LeNatures ► MF Global ► Mid-America Agri Products ► Pacific Ethanol ► Peregrine Financial Group ► Pierre Foods, Inc. ► Pilgrims Pride ► Stamp Farms / Northstar Grain ► Universal Cooperatives ► VeraSun ► Walterman Implement ► White Energy ► Wisconsin Rapids Grain
Agribusiness BFF: Common Themes
Agribusiness BFF: Common Themes
WE HAVE A CAPITALIST SYSTEM,
AND BUSINESS FAILURES HAPPEN.
BUT THERE’S A DIFFERENCE BETWEEN STRAIGHT BUSINESS FAILURE AND FRAUD.
Agribusiness BFF: Common Themes
WARNING SIGNS OF FINANCIAL DISTRESS: ► Deteriorating financial performance
► Declining profitability ► Leverage ► Liquidity constraints
► Stretching of trade payables ► Industry or economic downturns ► Competitive environment ► Loss of key customers ► Weak financial systems and reporting
Agribusiness BFF: Common Themes
WARNING SIGNS OF FINANCIAL DISTRESS (continued): ► Unanticipated costs
► Commodity prices ► Energy prices ► Food prices
► Changing consumer preferences ► Labor costs ► Management weakness ► Turnover in personnel
NOTE: Some things are outside of management’s control.
Agribusiness BFF: Common Themes
WARNING SIGNS OF FRAUD: ► Payroll taxes not paid, tax returns not timely filed
► Aging of trade payables, multiple supplier rotation, overdrafts
► Aging of accounts receivable; special discounts, allowances and terms; growth of (ineligible) receivables
► Untimely posting of credits, returns and other allowances
► Inventories – growth, turn, obsolete inventory, valuation, the importance of physical inventory inspection
► Cash flow issues, lack of detailed projections, lack of information
Agribusiness BFF: Common Themes
WARNING SIGNS OF FRAUD (continued): ► Lack of transparency
► Mismatched metrics – receivables, inventories and payables, profit and expenses, agings and sales
► “Top Secret” projects
► Litigation
► Turnover in accounting firms
Agribusiness BFF: Common Themes
THE “FRAUD TRIANGLE”
Pressure / Motive -need for liquidity
Perceived opportunity
Rationalization / Lack of management integrity / Ego
There’s a difference between premeditated fraud and fraud resulting from desperation.
Agribusiness BFF: Common Themes
FINANCIAL STATEMENT FRAUD: ► Inappropriate revenue recognition
► Understand costs and expenses
► Inadequate loss reserves
► Overstated or nonexistent assets
► Related party transactions
Agribusiness BFF: Common Themes
COLLATERAL FRAUD: ► Hiding the nature of the collateral ► Preventing another party from knowing its rights ► Double-billing and fictitious accounts – receivable verifications ► Pre-billing ► Credit memos, rebilling, dilution ► Double-pledging ► Conversion of collections – look for decrease in turnover and increase in dilution ► Failure to account for receivable collections in borrowing base ► Out of sequence invoices, repetitive numbers ► Real estate fraud ► Shipping and invoice testing – review of original documents
Special Considerations in the Agribusiness Context
Special Considerations in the Agribusiness Context
► Commodity price volatility ► Hedging errors ► Contract counterparty risk ► Overcapacity resulting from supply / demand imbalance ► Weather ► Liquidity crises ►Production cycles ► Food safety recalls
Special Considerations in the Agribusiness Context
►Statutory liens and trusts (PACA, PASA, Producer Liens, Food Security Act, Milk Producer Liens, etc.)
Note: These protections can still leave the contract counterparty holding the bag.
►Warehouse liens, claims by farmers to grain in storage, and rights of
state and federal licensing agencies
► Never a perfect time to liquidate an agribusiness company
► Managing outstanding contracts in a liquidation scenario ► Demand for adequate assurance of performance ► Ability of third party to enforce ► Risk of termination ► In or out of court
► How can a lender liquidate a food company
(Food Safety Modernization Act issues)?
Special Considerations in the Agribusiness Context
Special Considerations in the Agribusiness Context
► Borrowing base calculations may not be sound
► The problem with lending against “contract equity”
► The problem with collateral that eats and grows
► Unsophisticated players can defraud sophisticated players, and vice versa
Agribusiness BFF: Lessons Learned
Lessons Learned
► The importance of early detection of problems
► Greater flexibility the earlier you start
► The problem of the debtor’s non-recognition of a problem – waiting for a “miracle cure”
► Review of documentation, liens and collateral
► Understanding the priority of claims and ability to obtain additional security
► Establishing goals and strategy
Lessons Learned
► Identify structural issues (e.g., fraudulent conveyance issues, other secured lenders, affiliates)
►Perform a liquidation analysis (sets a baseline for negotiations). Consider how you would liquidate.
►Determine scope of debtor’s problems (temporary? legal? environmental? labor?)
►Evaluate company’s projections and management (realistic? competent?)
►Determine how to avoid further erosion
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