Agribusiness BFF: Common Themes THE

Agribusiness Bankruptcies,
Failures and Fraud –
BFF’s?
Agribusiness Bankruptcies, Failures
and Fraud – BFF’s?
Karen Boyer
Mike Stewart
Randy Humphreys
Breia Schleuss, Moderator
U.S. Bank National Association
Glenwood Management, LLC
Faegre Baker Daniels
Faegre Baker Daniels
Agribusiness BFF: Recent Examples
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AgFeed Industries
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International Garden Products
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Anderson Seed
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Interstate Bakeries
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Aurora Foods
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LeNatures
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Austin Packaging
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MF Global
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Cascade Grain Products
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Mid-America Agri Products
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Choice Genetics
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Pacific Ethanol
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C&K Market
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Peregrine Financial Group
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Eastern Livestock
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Pierre Foods, Inc.
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Fresh & Easy
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Pilgrims Pride
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Gateway Ethanol
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Stamp Farms / Northstar Grain
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Grabanski Grain
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Universal Cooperatives
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Groeb Farms
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VeraSun
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Hawkeye Renewables
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Walterman Implement
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Hereford Biofuels
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White Energy
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Hostess
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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:
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Deteriorating financial performance
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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):
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Unanticipated costs
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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:
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Payroll taxes not paid, tax returns not timely filed
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Aging of trade payables, multiple supplier rotation, overdrafts
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Aging of accounts receivable; special discounts, allowances and
terms; growth of (ineligible) receivables
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Untimely posting of credits, returns and other allowances
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Inventories – growth, turn, obsolete inventory, valuation, the
importance of physical inventory inspection
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Cash flow issues, lack of detailed projections,
lack of information
Agribusiness BFF: Common Themes
WARNING SIGNS OF FRAUD (continued):
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Lack of transparency
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Mismatched metrics – receivables,
inventories and payables, profit and
expenses, agings and sales
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“Top Secret” projects
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Litigation
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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:
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Inappropriate revenue recognition
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Understand costs and expenses
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Inadequate loss reserves
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Overstated or nonexistent assets
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Related party transactions
Agribusiness BFF: Common Themes
COLLATERAL FRAUD:
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Hiding the nature of the collateral
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Preventing another party from knowing its rights
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Double-billing and fictitious accounts – receivable verifications
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Pre-billing
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Credit memos, rebilling, dilution
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Double-pledging
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Conversion of collections – look for decrease in turnover and increase in dilution
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Failure to account for receivable collections in borrowing base
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Out of sequence invoices, repetitive numbers
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Real estate fraud
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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
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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
Special Considerations in the Agribusiness Context
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Never a perfect time to liquidate an agribusiness company
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Managing outstanding contracts in a liquidation scenario
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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
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Borrowing base calculations may not be sound
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The problem with lending against “contract equity”
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The problem with collateral that eats and grows
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Unsophisticated players can defraud sophisticated players, and vice
versa
Agribusiness BFF: Lessons Learned
Lessons Learned
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The importance of early detection of problems
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Greater flexibility the earlier you start
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The problem of the debtor’s non-recognition of a problem –
waiting for a “miracle cure”
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Review of documentation, liens
and collateral
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Understanding the priority of claims
and ability to obtain additional security
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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