Dairygold and farmer debt.

Farmer Ed

http://www.independent.ie/business/farming/dairy/dairygold-allays-supplier-concerns-on-debt-structures-35391201.html

Anyone know what is the full story behind this?

"We [Dairygold] may transfer our interest in your debt to Bank of Ireland which may involve providing it with personal data including your name, contact details and transaction history.We and Bank of Ireland may share such data with our respective financial partners, insurers and financial guarantee providers who may use the data to administer your debt and/or any financial guarantee."

Why are Bank of Ireland looking for this? Very unusual to say the least? Never heard of a Bank looking for such detailed information from a Co Op before? Sounds like they are doing a detailed examination of the loan arrangement. Reading between the lines, what actually is going on here?

OverRide

It's looks like a standard legalese inclusion to allow for the possibility for the debt to be sold on,in which case whoever buys it from BOI will need your details to get paid back
They'll have bought it at a discount but will want repayment from you in full with interest
They can bring you to court

Glanbia are if freedoms information is correct doing it better and just considering selling the agribusiness warts debt and all to the CoOp
That at least is the sale of a viable business and some hope of getting the debt paid probably as a last resort (if necessary in a few cases) by sequestering Glanbia CoOp shares from the debtor
It's a friendlier solution and managed 'in house'

Dairygold presumably don't have that option as the debt is already CoOp owned and their standard CoOp shares wouldn't be backed up by very valuable plc shares

Farmer Ed

OverRide wrote: »

It's looks like a standard legalese inclusion to allow for the possibility for the debt to be sold on,in which case whoever buys it from BOI will need your details to get paid back
They'll have bought it at a discount but will want repayment from you in full with interest
They can bring you to court

Glanbia are if freedoms information is correct doing it better and just considering selling the agribusiness warts debt and all to the CoOp
That at least is the sale of a viable business and some hope of getting the debt paid probably as a last resort (if necessary in a few cases) by sequestering Glanbia CoOp shares from the debtor
It's a friendlier solution and managed 'in house'

Dairygold presumably don't have that option as the debt is already CoOp owned and their standard CoOp shares wouldn't be backed up by very valuable plc shares

I would have thought anyone owing money to Dairygold would have expected that it was a matter between themselves and Dairygold. I am not sure many would have expected them to share personal information with a third party? What it sounds like is that Bank Of Ireland are giving Dairygolds loans a lot of scrutiny at the moment to say the least. Not a good sign I would have thought. Usually when the Banks look for more information it means at the very least that they are getting a bit more cautious about the existing arrangement.

OverRide

Farmer Ed wrote: »

I would have thought anyone owing money to Dairygold would have expected that it was a matter between themselves and Dairygold. I am not sure many would have expected them to share personal information with a third party? What it sounds like is that Bank Of Ireland are giving Dairygolds loans a lot of scrutiny at the moment to say the least. Not a good sign I would have thought. Usually when the Banks look for more information it means at the very least that they are getting a bit more cautious about the existing arrangement.

No,I'd say it's probably that they're bundling the debt into some bond or other and BOI want that condition so they can sell it on
It must be within dairygolds authority to do that ?
It's not a good sign but not an unusual instrument

Water John

Was disturbed yesterday when I read that on Dairygold in the FI.

Can they legally reveal anyone's details to third parties without their express consent?
Think its a question for the Financial or Data Regulator or a judge.

The other issue is the person with the debt is also a shareholder in the coop, thus part owner.

This type of move is very disturbing, considering what Ulster Bank has done in bundling and selling to a vulture fund. We are really scraping the bottom of the barrell, morally, if our own coop is going to do this to its own shareholders.

Maybe BOI should apply the same remedy to DG and sell on their debt to a vulture fund. Maybe they are considering it already?

Kowtow, might be able to give a steer on this. Have I caught the issue by the wrong leg?

Farmer Ed

Water John wrote: »

Was disturbed yesterday when I read that on Dairygold in the FI.

Can they legally reveal anyone's details to third parties without their express consent?
Think its a question for the Financial or Data Regulator or a judge.

The other issue is the person with the debt is also a shareholder in the coop, thus part owner.

This type of move is very disturbing, considering what Ulster Bank has done in bundling and selling to a vulture fund. We are really scraping the bottom of the barrell, morally, if our own coop is going to do this to its own shareholders.

Maybe BOI should apply the same remedy to DG and sell on their debt to a vulture fund. Maybe they are considering it already?

Kowtow, might be able to give a steer on this. Have I caught the issue by the wrong leg?

As far as I know in the case of people who are shareholders, the shares are considered as security against any unpaid debt. How would this pan out with a bank in the event of they calling in the debt? Or what exactly are the shares worth? In a scenario where a Co Op entered into the realm of negative equity, theoretically shares might be worthless, or would the bank or who ever owns the loan be able to pursue farmers by other means?

Water John

This seems a pursuit of real assets of farmers. Are shares worth anything considering they are not liquid and is there any market?

kowtow

Water John wrote: »

Was disturbed yesterday when I read that on Dairygold in the FI.

Can they legally reveal anyone's details to third parties without their express consent?
Think its a question for the Financial or Data Regulator or a judge.

The other issue is the person with the debt is also a shareholder in the coop, thus part owner.

This type of move is very disturbing, considering what Ulster Bank has done in bundling and selling to a vulture fund. We are really scraping the bottom of the barrell, morally, if our own coop is going to do this to its own shareholders.

Maybe BOI should apply the same remedy to DG and sell on their debt to a vulture fund. Maybe they are considering it already?

Kowtow, might be able to give a steer on this. Have I caught the issue by the wrong leg?

I think I read somewhere that they had entered a factoring agreement with BOI - essentially that's when you sell your receivables (the invoices owed to you) on an ongoing basis to a bank or financier in return for payment of 70% or more up front, with the rest (less charges and interest) paid when the invoice itself is paid. It's a bit unusual where individuals are involved instead of businesses.

A lot depends on the nature of the agreement, depending on the level of "recourse" - in some the company simply raises money on the back of the pool of debt, but continues to do the collection itself and ultimately suffers any losses, in others each invoice is sold electronically and while the company might do the collection to begin with the debt is the property of the factoring company and they take on the credit risk. If they are going the whole mile, the factoring company will want as much info as possible about the obligors. In some circumstances the factoring company may begin to collect the old or doubtful ones and Dairygold may not have much control over the relationship. It all depends on what they have signed up for. It may also be that the individual invoices carry a stamp saying they have been assigned to the factoring company.

Are they allowed to? I suspect they have a clause in their general terms of trading to allow them to assign debt to a successor or assignee, and in Ireland they may not even need that anyway - so they can probably sell the debt although the question of what personal information they can transfer is more complex. It may only be the name and address together with the trading history, past and future, which is what the factor will be looking for to set credit limits etc.

If I have understood it correctly it's not very co-op like behaviour, I certainly wouldn't want to be supplying them if only because I wouldn't want to be paying a factor to collect money from my neighbours.

Does the dairygold MSA require you to purchase inputs from them?

Edit: this is what the independent says:

"Our members and customers should have no concerns with respect to this initiative. Debt factoring is a well-established practice for large companies. It is essentially a banking arrangement for the business based on our trading activity with members and customers," explained Michael Harte, Dairygold chief financial officer.

"It will make no difference to their trading relationship with Dairygold. They will continue to deal directly with the relevant personnel in Dairygold on all account and credit issues, and Bank of Ireland will not make direct contact with any customer."

He said that the new arrangement will not result in any change to Dairygold's relationships with its customers.

Water John

Thanks Kowtow. No, suppliers do not have to purchase inputs, though the idea was kited a few years ago. It would have led to war and they dropped it.
Less suppliers buying from them anyway esp with the rise of purchasing groups.

I presume also, many will transfer overdraft type funding and merchant debt onto a new Creed loan.

Farmer Ed

kowtow wrote: »

I think I read somewhere that they had entered a factoring agreement with BOI - essentially that's when you sell your receivables (the invoices owed to you) on an ongoing basis to a bank or financier in return for payment of 70% or more up front, with the rest (less charges and interest) paid when the invoice itself is paid. It's a bit unusual where individuals are involved instead of businesses.

A lot depends on the nature of the agreement, depending on the level of "recourse" - in some the company simply raises money on the back of the pool of debt, but continues to do the collection itself and ultimately suffers any losses, in others each invoice is sold electronically and while the company might do the collection to begin with the debt is the property of the factoring company and they take on the credit risk. If they are going the whole mile, the factoring company will want as much info as possible about the obligors. In some circumstances the factoring company may begin to collect the old or doubtful ones and Dairygold may not have much control over the relationship. It all depends on what they have signed up for. It may also be that the individual invoices carry a stamp saying they have been assigned to the factoring company.

Are they allowed to? I suspect they have a clause in their general terms of trading to allow them to assign debt to a successor or assignee, and in Ireland they may not even need that anyway - so they can probably sell the debt although the question of what personal information they can transfer is more complex. It may only be the name and address together with the trading history, past and future, which is what the factor will be looking for to set credit limits etc.

If I have understood it correctly it's not very co-op like behaviour, I certainly wouldn't want to be supplying them if only because I wouldn't want to be paying a factor to collect money from my neighbours.

Does the dairygold MSA require you to purchase inputs from them?

Edit: this is what the independent says:

Does this kind of arrangement look very much like an option a co op might only possibly consider when all other sources of finance have been exhausted? Definitely raising a few eyebrows.

W John speaking of the "Creed loan". It would appear that not every creed will qualify. Being Board Bia approved or in an environmental scheme are some of the preconditions set out. The two stories are possibly not un related as this 150m will go some way to reducing the amount of money owed to Co Ops.

alps

The amount of money owing to coops from what I hear is quiet astonishing. Both the Creed loans and this Dairygold endeavour are for certain a move to allow funds to be used for more productive reasons.

This seems to be the first type of invoice discounting operation used by a coop in its sale of goods to farmers, but not the first time it has been used in the sale of its dairy products to business customers. I know of one coop that does, and maybe should not be surprised if many more do so.

Is it a good thing or a bad thing...who know.s?

What I am surprised with is the comment from Mr. Harte, when he says that" and Bank of Ireland will not make direct contact with any customer".......I hope he is sure of this...

kowtow

Farmer Ed wrote: »

Does this kind of arrangement look very much like an option a co op might only possibly consider when all other sources of finance have been exhausted? Definitely raising a few eyebrows.

There is no way to be certain but as a general rule yes, you might give a floating charge on the sales ledger as part of a bigger finance package, but I'd have thought it relatively expensive and unwieldy to have a specific factoring package unless there is a good reason.

Small businesses with no fixed assets do it quite often, especially as the factoring company helps them with account management and credit control, also there are specialist international factors and discounters, for exporters who have a long lead time between paying for raw materials in cash and getting paid - for example. This is to try and match the cash-flow gap, particularly in businesses where the customer base is expanding fast.

On the face of it a dairy co-op not fit these profiles as it would have a relatively stable customer base and a fairly predictable sales & purchasing cycle, albeit that customers may go through periods of severe financial pressure (fodder crisis, etc. on a general level, TB restrictions, illness, death etc. on an individual farm level). I cannot see how a factoring company would be better able to accommodate these than a good co-op with the support of its bankers.

It's also usually the case that factors work for companies wholly engaged in "business to business" relationships. Of course farms are businesses, but they are overwhelmingly also sole traders and very often operate from home. In Ireland they can also be quite old fashioned and individual in their approach to the purchase ledger - a bit of a nightmare for a factor I would have thought although in the end a good risk because they certainly pay eventually.

As far as the offset point raised above is concerned - the idea that debt could be offset against either a milk cheque or a shareholding, I can't see how the benefit of these could be assigned to a factor. You can sell your assets, but selling your liabilities ("novation") is more complicated and often requires the express permission of the beneficiary (for obvious reasons, otherwise we would all have transferred our overdrafts to coco the clown years ago).

A lot here depends on the nature of the factoring agreement and whether the individual debts have been assigned to the factor or simply used as part of a security arrangement against a line of finance. Somebody should ask them this directly, and (as a shareholder) ask them to explain the rationale for choosing this method of finance. The answer might be perfectly straightforward and reassuring.

Edit: I take Alps point above, and agree on the Creed loan etc. - but you can easily see the issue here at least from a dairy farmers point of view. At any given moment how much net debt does a dairy farmer owe which is older than 28 days (i.e. the co-op account outstanding over 28 days less the value of any milk delivered but not yet paid for by the co-op)? You can see the potential for disquiet here - If a co-op (for example) is already factoring sales of milk there is a situation in which it might possibly be borrowing money against sales by it of milk it hasn't paid the farmer for yet whilst borrowing more money against input sales to the same farmer. This is the kind of imbalance that factoring companies used to look quite carefully at before factoring.

In all probability it is very straightforward and businesslike, in which case shareholders should be pleased, but I think it needs a detailed explanation.

Farmer Ed

kowtow wrote: »

There is no way to be certain but as a general rule yes, you might give a floating charge on the sales ledger as part of a bigger finance package, but I'd have thought it relatively expensive and unwieldy to have a specific factoring package unless there is a good reason.

Small businesses with no fixed assets do it quite often, especially as the factoring company helps them with account management and credit control, also there are specialist international factors and discounters, for exporters who have a long lead time between paying for raw materials in cash and getting paid - for example. This is to try and match the cash-flow gap, particularly in businesses where the customer base is expanding fast.

On the face of it a dairy co-op not fit these profiles as it would have a relatively stable customer base and a fairly predictable sales & purchasing cycle, albeit that customers may go through periods of severe financial pressure (fodder crisis, etc. on a general level, TB restrictions, illness, death etc. on an individual farm level). I cannot see how a factoring company would be better able to accommodate these than a good co-op with the support of its bankers.

It's also usually the case that factors work for companies wholly engaged in "business to business" relationships. Of course farms are businesses, but they are overwhelmingly also sole traders and very often operate from home. In Ireland they can also be quite old fashioned and individual in their approach to the purchase ledger - a bit of a nightmare for a factor I would have thought although in the end a good risk because they certainly pay eventually.

As far as the offset point raised above is concerned - the idea that debt could be offset against either a milk cheque or a shareholding, I can't see how the benefit of these could be assigned to a factor. You can sell your assets, but selling your liabilities ("novation") is more complicated and often requires the express permission of the beneficiary (for obvious reasons, otherwise we would all have transferred our overdrafts to coco the clown years ago).

A lot here depends on the nature of the factoring agreement and whether the individual debts have been assigned to the factor or simply used as part of a security arrangement against a line of finance. Somebody should ask them this directly, and (as a shareholder) ask them to explain the rationale for choosing this method of finance. The answer might be perfectly straightforward and reassuring.

Edit: I take Alps point above, and agree on the Creed loan etc. - but you can easily see the issue here at least from a dairy farmers point of view. At any given moment how much net debt does a dairy farmer owe which is older than 28 days (i.e. the co-op account outstanding over 28 days less the value of any milk delivered but not yet paid for by the co-op)? You can see the potential for disquiet here - If a co-op (for example) is already factoring sales of milk there is a situation in which it might possibly be borrowing money against sales by it of milk it hasn't paid the farmer for yet whilst borrowing more money against input sales to the same farmer. This is the kind of imbalance that factoring companies used to look quite carefully at before factoring.

In all probability it is very straightforward and businesslike, in which case shareholders should be pleased, but I think it needs a detailed explanation.

Thanks for that. From a lay man's point of view it does look rather like using the credit card to pay off the overdraft.

Water John

Well, all the debt in Dairygold's own books (€200m if memory is correct,) was due for repayment by the end of 2017.
I don't know if this is normal.
This then could be part of that renegotiation. Further tags by its bank. DG would not have been in any position to repay and would have been in a fairly poor negotiating position. Doubt if they would have alternate suitors.

Farmer Ed

In what may or may not be an unrelated story. Dairygold are reported to be looking for a new processing manager as their existing one has handed in his notice. His decision is reported to have not gone down well and it is reported that he could lose out on a substantial bonus as a result of leaving. Also a recent meeting between senior management and other staff is reported to have been heated.

I wonder how common these bonuses are? Not picking on this guy or anything and to be fair he is said to have been well respected. We would all probably claim a bonus if in his position. But how widespread is this culture and what do you have to do not to qualify?

Bass Reeves

Water John wrote: »

Well, all the debt in Dairygold's own books (€200m if memory is correct,) was due for repayment by the end of 2017.
I don't know if this is normal.
This then could be part of that renegotiation. Further tags by its bank. DG would not have been in any position to repay and would have been in a fairly poor negotiating position. Doubt if they would have alternate suitors.

Most large companies have rolling debt that is often on 5,10,15 years cycles. The money is borrowed often as a bond with an fixed interest rate that is paid annually or rolled up to be repaid at end of cycle. Mostly the interest is paid annually and if you fail you are in default and bond holder can call in there total debt. Companies will often have different debt cycles. If this is the total Dairytale debt it is unusual to have it all maturing at the one stage.

Water John

It is not down as a bond. All realisable at end of the year.
Very weak negotiating position. Agree our extra conditions or go and find a new bank would be my opening bank position.
DG would have no way of repaying it.

kowtow

Bass Reeves wrote: »

Most large companies have rolling debt that is often on 5,10,15 years cycles. The money is borrowed often as a bond with an fixed interest rate that is paid annually or rolled up to be repaid at end of cycle. Mostly the interest is paid annually and if you fail you are in default and bond holder can call in there total debt. Companies will often have different debt cycles. If this is the total Dairytale debt it is unusual to have it all maturing at the one stage.

It may be that they embarked on a big refinancing at some point and tried to bring as many facilities as possible into the same maturity, either because rates were low or because they had to reorganize to avoid risk of breaching a covenant somewhere.

I'd be surprised if absolutely everything was in the one facility though.

Is there a note in the accounts making it clear?

Water John

My reading is and from meetings is that, its a loan, interest rate just under 3%, due by the end of the year. It is with a consortium of lenders with BOI as lead.
CEO said, they were comfortable with their relationship with the consortium and would be negotiating with them. As per May 2016 AGM.

This bank facility,and possible amendments, would seem to have dictated the letter to suppliers in Dec.

The facility, covers everything from merchant credit to farmers to paying the capital cost of building Mallow.
It would be very bad advice for a farmer to use cash flow and overdraft to build a milking parlour.

Banks hold all the aces. DG in a take position. My view.

Bass Reeves

Water John wrote: »

My reading is and from meetings is that, its a loan, interest rate just under 3%, due by the end of the year. It is with a consortium of lenders with BOI as lead.
CEO said, they were comfortable with their relationship with the consortium and would be negotiating with them. As per May 2016 AGM.

This bank facility,and possible amendments, would seem to have dictated the letter to suppliers in Dec.

The facility, covers everything from merchant credit to farmers to paying the capital cost of building Mallow.
It would be very bad advice for a farmer to use cash flow and overdraft to build a milking parlour.

Banks hold all the aces. DG in a take position. My view.

I would tend to disagree with you. In the agri sector credit is a crucial component of the business. By rolling all debt into one facility it seems to allow DG to achieve a very competitive interest rate and to avoid short term overdraft rates that are crucifying.

I deal with DG now and again and have an account that I may use for fertlizer or ration at times. They tend to be slow to write off interest. In general there interest rates are competitive but still is 8-9% I think. If this money is 50/50 capital versus merchant credit it makes complete sense. We are still in part of the low interest cycle so it is very likely they will achieve a medium term roll over facility at sub 3%. The money they make on merchant credit is paying the total interest bill

It a case of ''money for nothing and the kicks for free''

It should be noted as well it is quite common in the corporate world to roll over debt rather than paying it down like a mortgage you then build up cash reserves to allow you to expand.

Farmer Ed

Bass Reeves wrote: »

I would tend to disagree with you. In the agri sector credit is a crucial component of the business. By rolling all debt into one facility it seems to allow DG to achieve a very competitive interest rate and to avoid short term overdraft rates that are crucifying.

I deal with DG now and again and have an account that I may use for fertlizer or ration at times. They tend to be slow to write off interest. In general there interest rates are competitive but still is 8-9% I think. If this money is 50/50 capital versus merchant credit it makes complete sense. We are still in part of the low interest cycle so it is very likely they will achieve a medium term roll over facility at sub 3%. The money they make on merchant credit is paying the total interest bill

It a case of ''money for nothing and the kicks for free''

It should be noted as well it is quite common in the corporate world to roll over debt rather than paying it down like a mortgage you then build up cash reserves to allow you to expand.

From memory if I remember correctly I am pretty sure the interest rate charged on overdue accounts is 16%, should be on the back of the sales invoice if you have time to check.

ganmo

It's going to affect every credit customer of dg. If they attempt to get any loan from boi they will instantly know how they use credit and how much you have outstanding.

The only other time I've heard of this kind of arrangement was in relation to startup companies suffering from cash flow issues. And I can't remember if it was a bank or a debt collection angency advertising it

Water John

I am au fait with credit use of companies. Its the stop end date, with it all falling due on the end of 2016 was the problem. It thus was not an ongoing credit facility. This then was falling due, just with the Mallow plant, completed. With a significant portion of it used to finance the Mallow plant.

The interest on farm credit is charged at 1% compound per month. Thus, if a farmer falls behind this can amount to a serious further drain on finances.
A Creed loan will be a welcome alternative for the farmer and shop for the best price and conditions.

If they are so unhappy with there production manager leaving, they can put him on gardening leave whilst he is on notice.