The Do’s and Don’ts of Farm Debt Mediation
Farm debt mediation (FDM) has been an important part of the agricultural landscape in New South Wales for twenty years. Similar legislation has now been enacted in Victoria, with other states expected to follow. After more than 2,000 mediations, it would be tempting to assume that FDM would be well understood by all participants, and carefully integrated into the management of financial distress; sadly, that often isn’t the case.
The single biggest obstacle to the effective use of FDM is the tendency to view it as a discrete process, rather than an integral part of a debt management strategy. This strategy must begin well before the mediation itself, and will continue long afterwards. The mediation is a key inflexion point in that process, but is only truly successful if both farmers and financiers are properly prepared, with the right support; enough information; and a willingness to make decisions.
Farm debt mediation is intended to be a flexible process. Whilst this is generally the case, there are some common features behind those mediations that achieve the best results, and similarly recurring patterns in those that disappoint.
Don’t underestimate the importance of mediation day
Whilst mediation is one stage in a process, it is the one day when the borrower can secure a commitment from the financier to timelines which they can control. Financiers come to farm debt mediation ready, and keen, to reach a mutually acceptable agreement. However, they also have a clear path forward via security enforcement if this isn’t possible. Mediation can be the last opportunity for the borrower to exert a positive influence over what happens next.
Don’t arrive without a comprehensive understanding of the business
To achieve the most realistic and acceptable outcomes on the mediation day, both parties need to understand and be able to articulate the financial position of the business and the ownership and lending structure. Both need to be thoroughly prepared with all the necessary financial and business information. Only then can the appropriate decisions be made with confidence by both parties. Engaging a specialist agribusiness advisor to conduct an independent business review prior to mediation addresses this issue, and ensures that both the financier and borrower have confidence in the plans and decisions made at mediation.
Do make sure that you bring the right support team
Given the importance of the day; both parties (but especially the farmer), should ensure that they have access to all those whose support they will need to rely on to make decisions during the mediation. These may include professional advisors such as accountants and lawyers; rural financial counsellors; family members (especially those who are part of the business or are borrowers or guarantors); and anyone else who can provide the support to allow the farmer to make clear, focused and pragmatic decisions on the day. Often, the borrower will not understand the need for others to help them deal with the stresses of the decision making process, however, other family members tend to understand this well.
Don’t go quiet
Nothing is more likely to unnerve a financier than silence from the borrower leading up to the mediation. Often, lack of communication is central to the problem in the first place, making financiers even more sensitive to this issue. Whilst the mediation itself is a very effective forum for open dialogue, financiers’ willingness to agree to requests by borrowers often depends on full communication by both sides. Provision by the borrower of regular updates leading up to the FDM is a good way to demonstrate that this can happen. Never is this more important than when problems arise. Most financiers are looking for “no surprises” on mediation day, so early communication of any potential difficulty approaching the mediation will often be a first step to rebuilding confidence between the parties.
Do address the past, then move on
“History” is a difficult topic in FDM. Farm distress is often caused, or contributed to, by mistakes made, or “bad luck” outside the borrower’s control.These factors should be understood and articulated. In particular, where lessons have been learnt from previous mistakes, or strategies put in place to mitigate risks in the future, this will be relevant in winning ongoing support from financiers. Once these past matters have been discussed, it is essential for the farmer to focus on the future; however difficult the past may have been.
Don’t put all your eggs in one basket
Most farmers will enter mediation with one goal. This may be to secure extended facilities, or enough time for a refinance elsewhere or alternatively to prepare for a sale, or a sub-division and part sale. In every case, this approach has two problems: firstly, it relies on events outside of the borrower’s control (a strong season; council consent; a buyer at the right price, etc); and secondly, the financier may have different ideas. Both parties need to be prepared with a number of alternative plans, rather than relying entirely on one. These alternative plans can be discussed at the mediation, and incorporated in the terms of settlement, but require careful critical path analysis in order to be credible and therefore acceptable to, the financier.
Do understand what drives timing
Farm debt mediations typically take place after a long period of financial underperformance, when not enough may have been done by both parties to address the problems that have arisen. Financiers tend to initiate FDM relatively late in the process, but are then keen to see progress immediately afterwards. Borrowers, conversely, tend to want as much time as possible; often without really understanding why, nor appreciating the added burden of accruing (and often default) interest. Farms, however, are not “widget factories”, and there are often uncontrollable seasonal and market factors driving revenue. These may also dictate the optimum timing of any property sales. These constraints may not always be front-of-mind for financiers focused on a rapidly deteriorating financial position. A well prepared borrower must be able to explain the timetable for any work-out plan. This must not be seen purely as an excuse to delay action.