Sydney-based Merricks Capital was the first foreign investment fund to break ranks with a $140m refinancing of dairy farmer Van Leeuwen Group in December.
The money manager said it is targeting $2 billion out of $10b in farming loans it believes the Australian-owned banks want off their balance sheets in the next five years.
After years of strong lending growth the Australian banks are reassessing their involvement in the New Zealand market after the Reserve Bank doubled the amount of capital they must hold against their loans.
Capital-hungry farm lending is seen as particularly vulnerable to a credit squeeze.
Wishart, the managing director of NZ Agri Brokers said Merricks Capital is not the only foreign fund in the debt refinancing market.
“There are between five and 10 at different stages of inquiry at the current point in time looking at specific transactions.
“And I am not professing to know them all.”
In September the country’s largest rural lender, ANZ, said it had rejected approaches from foreign hedge funds interested in acquiring its rural loans.
“The banks are looking to unload some of their more leveraged loans and have considered these approaches but have recognised quite correctly that the reputational risk of selling loans to potentially higher-risk funders is quite significant,” Wishart said.
The funds are now approaching farmers directly with money to pay off the banks.
The terms offered are usually more expensive and for shorter terms but could buy distressed borrowers time not being offered by their bankers.
“They are probably not a long-term solution and should only be considered by sophisticated farmers in very limited situations.
“Our understanding is that all of these financiers do want to have some sort of exit strategy.
“Whether that is two or five years they still see themselves in and out.
“So, farmers still need to work out how to get back to being bankable.”
Most of the funds are interested only in deals of between $50m and $100m.
“There might only be 10 or 15 deals of that scale.”
Even if all of those deals were completed it leaves the banks with more exposure than they want.
Instead, the focus of the Australian lenders will probably go on reducing loan-to-farm value ratios.
That will involve pushing farmers for increased principal repayments.
“At the moment the banks are out as far as 70% LVRs but they are keen to get back to 50% or 60% which will take some years to achieve.”
That funding gap that will create for some farmers has the potential to be plugged by local, non-bank players, Wishart said.
“As well as the hedge funds coming in on the high-risk stuff we are seeing some innovative businesses coming in and looking at how they can fund machinery or livestock or working capital to look at growing a bit of a loan book that way and work alongside the trading banks.”
Wishart said that could result in the banks reducing their LVRs to be more in line with those in Australia.
