Equine Lending's Stormy Climate
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In both good times and bad Kentucky horsemen always felt secure that their bankers could be counted on to pump in needed funds and keep their operations humming. But now, cash-strapped breeders and owners grasping for that longtime lifeline are often finding nothing at the end of the rope.

Financial institutions long thought of as allies of the state’s $4-billion equine industry have been forced to become less friendly to clients already struggling against oppressive economic dynamics.

Lending programs from banks servicing the historic equine industry of Central Kentucky have plummeted by 60% in the last two years, according to David Switzer, executive director of the Kentucky Thoroughbred Association, from an estimated $1 billion in 2007 to a current level of about $400 million.

Gone for many horsemen is the ready capital needed to keep their businesses solvent or to make new purchases, as economically-pressured banks reel in lending portfolios thought to be less-than-conservative.

“It’s not just our industry; banks just are not lending money,” said Switzer, who has met with banking and Federal Reserve officials in an attempt to get a feel for the crisis. “It’s tight on people getting working capital.”

This article first appeared in the Feb. 20 issue of The Blood-Horse. Click here to start your subscription.

Prominent horsemen such as Ahmed Zayat, Cash Asmussen, and Bobby Hurley were separately sued in December by banks for allegedly defaulting on loans. In the case of Zayat, who has statistically been one of the nation’s leading owners in money earned in recent years, the disputed amount owed to Fifth Third Bank alone is more than $34 million.

But another industry player said those legal wranglings are just the proverbial tip of the iceberg.
“I sympathize with Ahmed and the others, but there are people that have even more serious problems,” said owner/breeder Satish Sanan, a computer outsourcing and software industrialist who sits on the boards of several racing and breeding organizations. “There are others who have $35 million to $50 million in loans. They have no money; they’ve leveraged all their property and assets. The issue is far deeper and more serious than what you read in the (trade publications).”

The bank industry’s woes have been well-documented since the real estate bubble of the last decade began to collapse a few years ago. Federal bailout money was infused in an attempt to halt a collapse of the entire financial system, and intense regulations followed along with a flurry of bank mergers, acquisitions, and failures.

One such by-product of the torrid transaction period was the acquisition of National City Bank by PNC Bank in late 2008. With it the sprawling equine lending program of National City became history.

“(The acquisition) offered an opportunity to take a second look at the business case for each, given PNC’s existing credit and risk-management policies,” said PNC Bank vice president of corporate communications Frederick Solomon. “In most cases the review confirmed PNC’s earlier decision. We have started to wind down our lending in these areas, largely by curtailing existing credit lines and declining to write new lines.”

Keeneland Association president Nick Nicholson said the demise of the National City program siphoned several hundred million dollars from the lending pipeline to the Thoroughbred industry.

“Poof, it’s gone,” said Nicholson. “With the merger to PNC, within 18 months, it was all gone. Totally disappeared.”

Nicholson said various “economic” factors outside the horse industry affected financial institutions at the same time, forcing them to rethink strategies. “They’re saying, ‘We need more collateral; and oh, by the way, your horses are worth less.’ ”

Other large banks such as J.P. Morgan Chase and Fifth Third are also modifying their lending practices but say they are not getting out of equine programs.

“Fifth Third Bank remains committed to responsible lending for our personal, small business, and commercial clients,” a statement from the Cincinnati-based bank read. “This includes equine lending, which continues to service its customers. Although this is a challenging economic environment, we balance our commitment to our customers and community with safe lending practices.”

Still, cold numbers don’t lie. PNC, J.P. Morgan Chase, and Fifth Third combined to record more than $44 billion in “troubled assets” (past-due loans, non-accruing loans, and property gained through foreclosures) as of September 2009. That total, compiled by the American University School of Communication Investigative Reporting Workshop, represented a 136% spike over the same period in 2008. Many local and regional banks known to lend to equine operations also have seen such large “negative” increases.

Thus, banks are becoming increasingly spooked by the always-volatile Thoroughbred industry, which has recently seen a 40% to 50% decline in auction sale prices—a key for loan collateral appraisal value. Adding to banks’ wariness is not only the length of time it takes for a breeder to yield a sales result from a mating, but possible pitfalls along the way that can hurt a foal’s value.

“It only takes a misstep or two along the way and the breeder is potentially tipped into an economically stressful situation with the foal,” said Louisville-based attorney Joel B. Turner, who is also a breeder/owner. “The breeder needing the cash flow to service debt can’t sell when it would be the best opportunity—yet the bank may expect the breeder to proceed with the sale regardless.”

This downturn in the economics of the Thoroughbred industry is different from the last milestone period of the late 1980s, said Lexington-based equine attorney Michael Meuser. Unlike today few breeders at that time used their horses as loan collateral, he said, and stud fees were a much smaller part of an owner’s investment in a foal. Then, deadlines on stud fees slowly evolved from Sept. 1 of the mating year to “stand and nurses,” or in some cases, when the resulting foal sells.

“Put all that together with a 50% reduction in sales, and formulas banks use to calculate returns, and that’s the disaster we are dealing with,” Meuser said. “I think it is going to take some time to get past this. And everyone is going to suffer some. Stud farms are not going to be able to collect 100%. There are banks that will end up with deficient loans. Over time we are going to see people who were stretched too thin to be in this game drop out.”

Stallion operations are sometimes caught on the outside of the battle between horsemen and banks because they sign separate stud fee contracts with breeders.

“It’s unfortunate that so many (breeders) use bank money for stud fees,” said Jamie Lamonica, a Lexington-based stallion manager and mating analyst who also co-owns Empire Stud in Hudson, N.Y. “They are basically asking the stud farms to bank them. Stallion farms are getting hit from both sides. They need cash flow, but they also need to get mares to their stallions.”

A situation involving California breeder/owner Jerry Jamgotchian is a clear example of the titanic tug-of-war ongoing among breeders, banks, and stud farms. Jamgotchian, who annually breeds 40 to 50 mares in Kentucky and typically finances through banks in the state, tried to renegotiate lower stud fees with Ashford Stud after he realized poor results at the 2009 Keeneland September yearling sale. Ashford balked at any renegotiation and eventually sued Jamgotchian in Kentucky state court for nearly $400,000 in stud fees and related expenses.

Both sides acknowledge Ashford refused to release liens it had placed on Jamgotchian horses, which Jamgotchian claims was an effort to “sabotage” a new loan he was trying to secure from a Kentucky bank. The matter was settled when Jamgotchian paid Ashford, but he is angry Ashford wouldn’t work with him when other stallion operations would.

Meuser, who represented Ashford in the legal action, claims the stud farm worked with Jamgotchian through multiple sale cycles in attempts to get his horses sold and felt enforcing the liens was the only protection it had.

“Give credit to the stud farms,” he said of those operations unwilling or unable to alter contractual obligations. “Two years ago when you sold a yearling for six times the stud fee, you didn’t have people come in and say, ‘I want to give you more money.’ ”

Lamonica said most of his clients are up-front about their struggles, and he will work out payment plans with them. But he has little sympathy for those who say they just aren’t going to pay at all. “They go into another category,” he said. “If they don’t want to meet this obligation, I’ll just let my attorney deal with it. People like that are using the economy to get out of paying bills.”

Breeders’ Cup Ltd. is not yet feeling any ripple effects of the credit crisis, said Matthew Lutz, the organization’s chief operating officer and chief financial officer. Payments on stallion nomination fees are about the same as in recent years, with less than 3% of all 2009 nominations still open for collection.

Revenue challenges for Breeders’ Cup may come in future years as foal crops decline, he added. Foal nominations in 2009 dropped to 12,600 from 14,600 recorded the previous year, according to Lutz.
Contrary to some rumors Keeneland and Fasig-Tipton say they have no plans to launch lending divisions to help fill huge cash voids left by the banks but will work with others outside and inside the industry. Under different ownership Fasig-Tipton once operated a finance and leasing subsidy called Thoroughbred Equity Co., which was shut down in the late 1990s.

“It was a bad business model,” said Fasig-Tipton president and chief executive officer Boyd Browning. “We always are trying to explore avenues to build a better company and serve the industry. That said, we don’t have a plan to roll out something in the next 30 days. I really wish I could say that the sales companies are going to form an entity, but we don’t have any immediate plans.”

Nicholson added, “I wish I had a magic wand we could wave to create a billion dollars or so. But it’s not going to happen. Here’s what Keeneland is doing: We are reaching out to smart people who care about the industry as much as we care about the industry and are trying to see if there are smart business decisions that could help alleviate the problem.”

This article first appeared in the Feb. 20 issue of The Blood-Horse. Fill out the form below to start your subscription.

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