Royal Commission Final Report – Distressed Agricultural Loans

This article is the second in Hamilton Locke’s series on Commissioner Hayne’s Final Report on the Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry (Report). The first article in our series was Royal Commission Final Report – Intermediated Financial Products by Hamilton Locke partners, Zina Edwards and Hal Lloyd, and addressed a key theme that emerged from the Report; the dislocation of the retail channel for various financial products.

The current climate for agribusiness

Australian agribusiness is a large industry, operating across approximately 51% of Australia’s total land area. With a 2.8% increase in the number of agribusinesses between the financial years ended 30 June 2016 and 2017 (to 88,073) and a 6.1% increase in agricultural land holdings between the same period (to 393,797,000 ha) (ABS, 2018), investment in agribusiness has experienced a significant increase.

The loss of approximately 500,000 drought-stressed cattle in the recent Queensland floods is part of a series of significant climate events that have been placing downward pressure on the performance of farming operations. On 6 February 2019, the Bureau of Meteorology released its Drought Report for January 2019. In conjunction with its Special Climate Statement 68, each report casts a dire picture for the land use of agricultural businesses in 2018 and 2019, with unprecedented heatwaves and rainfall deficiencies on a national scale. As no less than eight of the ten hottest daily mean temperatures and six of the ten hottest nationally-averaged minimum temperatures occurred this summer alone, the significance of these events and the potential effect on agribusinesses cannot be overstated.

The recommendations

With this backdrop in mind, it is not surprising that several of the Report’s 76 recommendations are directed to the valuation of agricultural land and dealings with distressed agribusiness loans.

These recommendations include the enactment of a single national scheme of farm debt mediation to replace the inconsistent schemes of New South Wales, Queensland, South Australia and Victoria (with other states and territories not currently operating compulsory mediation schemes for enforcement of security over farm land). Beyond the regulatory difficulty of having multiple schemes in place, Commissioner Hayne emphasises that farm debt mediation has too often been treated as a step that is taken only because the lender considers enforcement probable, even inevitable, and the applicable scheme requires mediation before enforcement can proceed.

By not acting early to address the financial difficulties that caused the lender to treat the farm loan as distressed, Hayne considers the lender and borrower to have missed out on “wider and better choices” for servicing, and ultimately repaying, the loan. It is for this reason that Hayne recommends that the 2019 Banking Code of Practice (Banking Code) be amended to, among other things, require that banks and other creditors offer farm debt mediation to a borrower as soon as the agricultural loan is classified as ‘distressed’ (and not only when an actual default has arisen under the loan). The intention is for farm debt mediation to be used as a genuine opportunity to address issues facing the farmer or the farm and to work-out a way forward.

Commissioner Hayne also recommends that:

  • distressed agricultural loans be managed by experienced agricultural bankers;
  • banks manage every distressed loan on the footing that working-out will be the best outcome for bank and borrower, and enforcement the worst;
  • banks recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and to banks cease charging default interest when there is no realistic prospect of recovering the amount charged.

In recognition of the unique circumstances facing agricultural business in Australia, another recommendation of the Report is for a further amendment to the Banking Code which would prevent banks charging default interest on loans secured by agricultural land in an area affected by a drought or natural disaster (while an official proclamation was in place).

An emerging theme – enforcement as a last resort

A key theme of the Report is the positioning of formal enforcement of agricultural loans as a last resort. At the first sign of distress, Hayne recommends that farm debt mediation be offered to the borrower in conjunction with rural financial counselling services. The outlook being maximisation of choices for the lender and borrower about servicing, and ultimately repaying, the loan. If adopted this is not just a matter of policy for a bank – the recommendation is for this to be reflected in the Banking Code.

While these recommendations only address agribusiness loans, it will be interesting to see if banks and other lenders approach loans to other businesses in a similar way. While, as discussed above, there is no doubt that agricultural businesses face difficult environmental and cyclical forces that are often beyond the control of the affected farmers, other types of businesses are also subject to similar cyclical forces. If the recommendations are adopted, it will be interesting to see if the general approach that is adopted by banks (and non-bank lenders) similarly shifts to one of early engagement, assistance and workout over formal enforcement.

Impact on availability of credit for agribusiness

The other aspect that must be considered is what impact the recommendations will have on the availability of creditors for agribusinesses. Clearly the credit risks associated with the provision of agribusiness loans and the compliance burden will increase if the recommendations of the Royal Commission are adopted. The likely consequence is smaller farming operations having less access to traditional bank credit. In turn this may result in more consolidation across certain agricultural sectors with bigger operators that have more access to credit and capital buying up smaller players. There may also be opportunities for alternative lenders and investors to fill the gap left behind by traditional banks in the post-Hayne era.

In seeking to ensure that all Australian businesses have confidence and trust in the financial system and are treated honestly and fairly in their dealings with banks and financial service providers through a Royal Commission, it would be unfortunate if a consequence of the Royal Commission is reduced access to affordable capital. To this end, the Government will need to be extremely careful when seeking to implement the recommendations of the Report to ensure that agribusinesses are not casualties of the very recommendations that the recommendations seek to protect.


About the Authors

Zina Edwards is a Partner at Hamilton Locke and has extensive experience advising major trading and investment banks, syndicates, funds and public companies in relation to various high profile and complex financial turnarounds, restructurings and special situations.

Monty Loughlin is a lawyer at Hamilton Locke and is experienced in advising financial institutions and funds, strategic investors and creditors, public companies and insolvency practitioners in financial turnarounds, distressed transactions, restructurings, formal insolvencies, and related disputes.

Thank you to Morgan Sheargold for her assistance.

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