Loan Modification Tools to Provide COVID-19 Relief
By Tony Powell, Chief Credit Officer
One thing those involved in agriculture have always known, and the rest of the world has quickly come to realize during this pandemic, is that agriculture is essential. Unfortunately, that truth has not lessened the economic impact felt by most farmers and ranchers.
Social distancing measures have decreased the demand for products typically distributed through food service channels, which has negatively impacted markets. There are daily news reports about the current challenges farmers and ranchers face. Stories such as dairy producers dumping milk, the sheep industry not having a market for wool, the beef industry losing billions of dollars, packing plant closures due to virus spread and more are all a result of the current pandemic.
Western AgCredit’s mission is to provide a dependable source of credit to agriculture and the rural community. As a way to help us fulfill that commitment, we are prepared to offer practical solutions to help relieve the financial pressure felt from the impacts of COVID-19.
The Board of Directors and management are considering a number of measures to provide assistance to our entire membership since all agriculture producers have been affected by COVID-19. While we have the responsibility to ensure the continued safety and soundness of the Association, we’re considering ways to lean on the financial strength of the Association to provide immediate relief to all members. Stay tuned for more information on what Western AgCredit is doing to help agriculture and rural communities through this crisis.
To help provide immediate relief to individual customers, Western AgCredit is offering a number of loan servicing options. Western AgCredit will waive all applicable servicing fees for borrowers experiencing adversity as a result of COVID-19 that request a loan modification.
Below is a list of specific loan modification tools that may be available to help you overcome temporary financial challenges.
LOAN MODIFICATION TOOLS
What is it?
An extension is used to formally move an installment payment due date or the final maturity date of a loan to a later date. An extension moves only the current or next payment, all subsequent payment dates remain unaffected. Extensions can be used on operating loans or term loans.
Extensions are available to solve a temporary, short-term or nonrecurring cash flow challenge. Normally extensions are used when only a short amount of additional time (30 to 90 days) is needed.
Most extensions are generally limited to 90 days or less. Extensions longer than 90 days are limited to unique circumstances, but will be considered.
What is it?
A deferment moves the principal portion of a loan payment(s) to the final maturity date of the loan. Principal Deferments are typically used when the borrower is experiencing temporary circumstances that make it difficult to pay the entire installment amount when due (or series of payments, in the case of monthly repayment schedules). The interest portion of the payment remains due and payable on the regular installment due date.
One-time reduction in the amount(s) due as only the interest portion of the payment is required. The loan maturity date remains unchanged. A deferment can help preserve working capital by reducing term payments during temporary economic challenges.
A Principal Deferment creates a balloon payment at loan maturity, because the deferred amount gets added to the regularly scheduled final payment, plus the additional accrued interest.
What is it?
A Re-amortization is used to change the repayment schedule and/or maturity on installment loans. In some cases, additional debt can also be added to the loan. A re-amortization creates a new repayment schedule for the remaining term of the loan or extends the payments over a longer loan term.
Re-amortizations are typically used when the borrower is experiencing temporary economic adversity and needs to ‘skip’ a payment, or extend the payments over a longer term which can result in lower payment amounts for the extended term of the loan.
Loans with any type of fixed rate might also require a change to the rate. If the note’s original maturity date is extended or the current principal balance is increased, junior lienholders may be required to approve the re-amortization as well.
Installment Date Change
What is it?
Installment Date Change action is used to change the date or the frequency (monthly/quarterly/annual) when a payment is due on an installment loan.
This change is useful to align the borrower’s payment(s) due date(s) with the timing of receipts.
If a payment date is moved back, an interim interest payment is generally required so that interest accruals do not exceed the period between payments. Loans with a fixed rate may require a concurrent change to the rate.
Increases to Operating Loans
What is it?
In some cases, operating losses may require an increase to your operating loan to continue to fund operations through a period of negative cash flow. Temporary increases may be added to the existing note or financed on a second ‘set-aside’ note.
Additional financing can support continued operations to bridge a temporary economic challenge.
Long term earnings should support and justify the additional credit request. Increases are subject to credit approval. Additional collateral may be required.
What is it?
Used when a borrower’s loan(s) becomes distressed and they do not have the financial capacity to pay the loan according to existing term. Loan structures, terms and repayment schedules can be modified, either through modification of existing loans or a consolidation of existing debt into a new loan.
Loan terms, rates and structures can be adjusted to align with business capacity to repay, or to facilitate an orderly operational transition. In a worst-case scenario, a restructure can also facilitate an orderly liquidation plan.
Loan restructures should include a viable plan demonstrating a high probability of orderly debt retirement and return to long-term financial viability. Additional collateral may be required to support the loan(s).
If the COVID-19 pandemic crisis is presenting immediate disruption and uncertainty for your operation, please contact your loan officer today to determine if one of these options is right for you.