ROADNIGHT MUSING – JANUARY 2024
AUSTRALIAN AGRICULTURE –
STILL FACING A CRITICAL SHORTAGE OF CAPITAL
Agriculture remains a key hunting ground for Roadnight Capital and its various pools of capital. Over the last 3 years, Roadnight has made 21 loans to Agricultural enterprises and is fielding a growing number of enquiries from quality businesses requiring capital solutions.
Our investors have access to agriculture-based loans through our core ‘Diversified Income Fund’, Natural Capital Income Notes, and co-invest individual transactions. We particularly like the risk adjusted returns on offer for investors from lending to quality farming enterprises.
SO WHY IS THERE A SHORTAGE OF CAPITAL IN AGRICULTURE, ONE OF THE OLDEST BUSINESSES IN AUSTRALIA?
There are a range of factors driving the capital shortage in Agriculture, including major banks reaching sector limits, centralisation of credit processes within banks, and erosion of the specialised lending skills required to participate in agricultural lending. Simply, if there is any complexity and the client doesn’t neatly tick the box, it is hard to meet the credit processes of major bank lenders. This is especially the case if you are looking to borrow less than $20mil.
Roadnight recently financed an A$18.0 mil capital solution to a large 5,500ha mixed farming enterprise in Northern Tasmania. The loan facility comprised the following components:
a short-term bridge facility to fund the impending sale of a working property within the group.
a 3-year term facility, and
$1mil capex facility
At financial close, the loan-to-value ratio against land is 50%, moving to 35% post sale, with the farm’s operations comfortably serving interest under a range of sheep and lamb prices.
Of the many investment opportunities we have supported over the past 3 years in Agriculture, we particularly like transformation investment opportunities that involve undercapitalised assets being transformed via:
Access to water supporting business change
Asset reconfiguration to develop higher productivity operations
Investment in land use change from lightly timbered to irrigated pasture
Investment in technology to reduce cost and improve operational efficiency
Many of the challenges faced by agriculture are somewhat unique to the sector that operators and financiers need to overcome, including:
Considerable commodity price volatility.
Extreme weather and seasonal patterns.
Capital intensity, combined with lumpy production/sales cycles
However, for experienced financiers and investors, agriculture offers many unparalleled credit positives, including:
Increasing awareness and demand for healthy and sustainable consumer food products.
Global population growth, which is outstripping the output capacity of the food production industry, particularly protein-based foods.
Ongoing technology and operational efficiencies, which continues to improve the productive capacity of farming enterprises with targeted capital investment.
Scarcity of farming land resulting in incredibly stable property/land prices, and better than other risk asset classes despite the volatility of commodity and weather patterns.
Our due diligence process is exhaustive and sees us undertaking extensive stress testing on the farm’s viability under a range of commodity and weather-related scenarios using long-term databases to cover interest payments, on top of getting independent valuations done on the farming enterprise. The cornerstone of our lending philosophy is ensuring we are well protected by land, which typically underpins a loan to value ratio below 55% (with a maximum LVR of 65%), and well below 50% if incorporating the value of stock, crops, and equipment.
In our view, Agriculture offers superior risk adjusted returns to many other property-backed private debt asset classes. Historically, we have been able to generate low-to-high teen returns from loans where you would need land prices to fall 50% before you would be impacted, comparing favourably to senior debt lending across development and construction projects, as well as residential and commercial property backed lending. We don’t see this situation changing anytime soon.
Please let us know if you would like to know more.