By Bernie Peet
Mainstream banks can be notoriously fickle when it comes to agricultural lending, especially to cyclical enterprises like hog production. At times like this, when hog prices are low and feed costs high, they may get cold feet and pull the plug on a business that is suffering cash flow problems. If a business falls outside their predetermined lending benchmarks it may be the end of the road irrespective of how successful the farm has been in the past or what the prospects are for the future. So what’s the best strategy for survival if the bank gets nasty? And how do you manage to hang onto the farm and not lose everything?
Five years ago, Karel and Margje Van Giersbergen, who currently operate a 400-sow farrow to finish operation near Lacombe, Alberta, started an 18-month battle for survival with their bank that cost them $100,000 and left them emotionally drained. In fact, the experience was so traumatic that only now, more than three years after their financing situation was resolved, are they prepared to talk about it. Now they are happy to share their story with others in the same position and help them through the ordeal and have recently helped several producers in Alberta, one who unfortunately lost the farm but others who are still hanging on and fighting.
The Van Giersbergens immigrated to Canada in 1992, selling the family hog and dairy farm in the Netherlands and purchasing a 70-cow dairy farm just outside Lacombe. They sold this farm in 1998 and built a new 2200-place finishing barn, then in 2001 completed building a 400-sow unit to supply the finishing barn. They had been a customer of their bank since 1993 and had a good relationship with the local account manager. As their business developed, the bank was happy to support them. Their equity position was good because of the capital from their farm in the Netherlands. Everything was going well as they established themselves in their new country. “We always kept the bank aware of our plans to develop the business and the likely borrowing requirements,” says Karel. “If they know you plan to buy land when it becomes available, then they are alright with that, but they don’t like last-minute requests for a loan.”
After the Van Giersbergens sold the dairy unit, they started construction of the new finishing barn. With the sale value of the dairy, they had lots of equity and the bank was more than happy to provide capital financing and an operating loan. Construction on the sow barn started in November 2000. The bank continued to support them and offered a $1 million line of credit for the barn construction, to be converted to a long-term loan once the barn was complete. In July 2001, the first gilts came into the barn as construction continued and by early 2002 the unit was complete. When the total costs were finalized, the project was $80,000 over budget and that’s when the problems started with the bank. At the same time, the hog price was low and feed costs high. However, Karel and Margje had signed a 5-year contract with Rocky Mountain Pork to supply pigs to Olymel, which provided a good degree of price protection through a window system that increased the hog price if feed costs rose. They thought the bank would place some real value on that, but they were wrong. What the bank did was to provide the $80,000 extra loan but sent them to the “Special Loans” department. “That seemed to be the point at which the bank decided we were a risky account and one they wanted to dispose of,” says Karel. “After that, it really started to get nasty.” The bank seemed not to understand the benefits of the contract with RMP and, says Margje, didn’t seem to want to understand it.
In July 2002, the bank demanded a cash injection of $200,000 or a sale of assets; the alternative was foreclosure. The Van Giersbergens worried that, if they had to sell the farm, the value would be low because of the poor hog prices. They decided to refuse and fight the bank. “I’m sure the bank had a policy of getting out of agriculture at that time,” says Karel “They had lost a lot of money in some other areas, their shares had fallen and I think they wanted to reduce their exposure to risk.” The bank said the debt loading per sow was too high and they could never service the loan, but production was good, with 24-25 pigs shipped per sow. “It is a high cost operation because we chose to be very automated, with liquid feeding throughout and an electronic sow feeding system,” points out Karel. “However, it’s also a high output system that can support a greater level of borrowing.”
In that summer of 2002, the Van Giersbergens noticed that the bank was not taking payments on the loan from their account. It made them think that the bank was doing this deliberately so they could later foreclose for non-payment so they sent a cheque to the bank. “It was obvious that the bank didn’t like us doing this, but we never missed a payment so if we ended up in court, there would be no reason for the bank to win a case,” says Margje. “This is the most important message for others in the same situation,” she stresses. “We never defaulted on our loan so were in the right all the time.” One lawyer had advised them not to make payments and keep the money to fight the bank, which in hindsight was very bad advice.
In November 2002, the Van Giersbergen’s were asked to sign a “Forbearance Agreement”. This stated that the bank would take no action to foreclose for two months and would monitor the business over that period. “This agreement basically says that the bank won’t come after you for two months but after that, you effectively give them the right to foreclose.” points out Karel. “That would mean the end of the road, so we didn’t sign.” They did, however, agree to signing a monitoring agreement that required them to send all their financial data to an accounting company appointed by the bank. The cost of this was borne by the Van Giersbergens and was agreed as a $4000 set-up fee and $350 per month, which they felt was acceptable. However, after three months, the bank sent a bill for $15,000, saying the information they were sending was not good enough, having previously stated that it was excellent. As they had a written quote for the lower amount the Van Giersbergen’s refused to pay.
By now it was June 2003 and the Van Giersbergens had already started to look for another lender to support their business, but the battle with the bank continued. The bank now said that they wanted to put in a non-farming receiver in charge of the farm, who would collect all the income and make all the payments, effectively taking control of the business. The Van Giersbergen’s lawyer said that this would cost a fortune and would bankrupt the business. They then decided to go to the Farm Debt Mediation Service based in Edmonton, which would send an experienced person to look closely at the business and help them in the mediation process. Having reviewed the situation, the person involved couldn’t understand why they had to go to mediation when they had never missed a loan payment. He commented that the situation hadn’t arisen because Karel and Margje had done anything wrong; it was just that the bank didn’t want to be involved any more.
At the mediation, it was shown that they were not in default but unfortunately they and the bank failed to come to an agreement. Indeed, says Margje, the bank didn’t want a settlement; they just wanted to get rid of the loan. However, both parties agreed to go before a retired judge from the Court of Appeal, an extension of the mediation process in which the judge reviews the case and gives an opinion on how a court would be most likely to rule. This took place in October 2003. The judge advised that if they took a case against the bank to court they would have a very good chance of success. However, the cost of this was likely to be $50,000 a year for five years. Having racked up $100,000 in legal bills and close to breaking point, the Van Giersbergens decided not to pursue the case further. They had also, by that time, secured a re-financing deal with FCC and AFSC so they could pay off the bank and get on with their lives. “Both these banks are very committed to agriculture over the long term and have been excellent to deal with,” stresses Karel.
So, what are the lessons from this sad saga? How can others learn from the Van Giersbergen’s experiences? The first lesson for survival is to keep making payments if you can, says Margje. “As soon as you stop, you are technically in default and the bank has the right to foreclose.” The second lesson is not to sign any agreement with the bank before understanding all the implications. “They basically make you sign your own execution warrant if you aren’t careful,” says Karel. “Get a lawyer to go through all the small print so you know what all the implications are.” The third lesson is to understand how the bank works and how they are likely to respond. “The minute there is a problem they will stop taking interest and just take money as capital repayments,” points out Karel. “That’s because interest payments are taxable so they want to get the principal paid down in case they have to write off the loan. They don’t know how to handle it when you specifically make an interest payment.” He praises the various people that supported him and Margje during the process, especially their feed company, and also says that they found the Farm Debt Mediation Service a very valuable tool.
The Van Giersbergen’s point out that, despite their loan agreement stating the words “long term loan agreement” 17 times, all such loans in Canada, unlike many other countries, are demand loans that can be called in any time at the whim of the bank. Having always made payments as determined by the loan agreement, never in their worst nightmares did they think that the bank would treat them like it did. Despite having survived the ordeal, they suffered incredible stress. “Surviving may be winning, but you don’t feel like a winner,” says Karel. “All our energy went into fighting the bank so we felt incredibly drained and it took us two years to recover.”
Click here to view photo of Karel and Margje Van Giersbergen
The Van Giersbergens are happy to provide support and help to others that are in a similar position and can be contacted on
(403) 885-2227.
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