ES-Lancaster Farming, Saturday, May 3,1986
A new innovative approach for
aiding financially troubled far
mers was recently introduced by
the American Farm Bureau
Federation. The plan, called Two-
Tier Debt Restructuring, has
received favorable support by the
Federal Reserve Board, the
Federal Deposit Insurance Cor
poration and the Comptroller of the
Currency.
It includes capital forbearance,
that is, allowing banks to operate
below the six percent of total
assets capital requirements if they
can replenish capital within five
years. Currently, banks desiring to
write off portions of farm loans run
up against this requirement and
discourage loan forbearance.
Two-Tier Debt Restructuring
would encourage the farm
operator and the lender to sit down
and analyze the individual
operation to determine how much
debt could be paid under normal
circumstances. That part of the
debt would become Tier One.
Under Tier One, the farm operator
would pay a portion of the farm
debt making a regular interest and
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Two-Tier debt restructure proposed
principal payment over a iu-year
period. The remainder of the debt
would be placed in Tier Two where
it would carry an interest rate of
three percent with no principal
payments.
As the portion of Tier One debt is
paid off annually, an equal amount
of the debt would shift from Tier
Two to Tier One until all the Two-
Tier debt is paid.
For example: If you have a
$300,000 debt, and after a thorough
analysis, the bank and borrower
decide that $200,000 can be
properly serviced; that becomes
Tier One. The remaining $lOO,OOO
becomes Tier Two debt.
In order to see Two-Tier Debt
Restructuring, there will need to
be regulatory changes which
would allow banks to operate at
below the six percent of total
assets capital requirement if they
can replenish capital within five
years. Current law discourages
loan forbearance by imposing
penalties on banks offering such
restructuring. Banks have, as a
rule, chosen to write-off bad debts,
which there is little chance of
collecting. In the farm community
these are the ones that end up in
foreclosure.
Debt restructuring for troubled
farmers has several advantages.
One, it gives the farm bank a
realistic chance to recover the
principal amount loaned and a
reasonable rate of interest on a
major portion of the principal.
Secondly, while the bank is
receiving a lower interest rate on
the second tier for a five year
period, the amount of the lower
interest loan is diminished each
year as a portion of the principal
shifts up to the first tier each year.
Thus the bank is sustaining a
relatively minimal loss in interest
compared to a total write-off of the
principal loan.
This program is a debt
restructuring - not a debt
forgiveness program. The farmer
will also benefit as he has set his
payments at a manageable
amount and he is able to pay off his
indebtedness, thus preserving his
credit and his farm.
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The Senate Banking Committee,
the Federal Reserve Board,
Federal Deposit Insurance Cor
poration (FDIC) and Comptroller
of the Currency have agreed to the
necessary changes to regulations
which would allow for debt
restructuring.
Banking experts and economists
have admitted that debt
restructuring is not for everybody.
It is obvious that some farmers
now have debt loads that make it
impossible for principal and in
terest to be paid from the income
of their operations under normal
conditions. Partial or total
liquidation may be the only
resource.
Again, it is important to stress
that in order to consider debt
restructuring, both farmer and
lender must do an indepth finan
cial analysis of the farming
operation to determine the amount
of nonworking debt and the amount
of interest and principal that can
be paid from the operation under
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normal conditions. The operation
should be analyzed from a profit
and loss on production, not on a
debt-to-asset ratio. No debt will be
forgiven.
Such a plan represents a
realistic approach to turning the
debt programs around. Land
values will stabilize, fewer far
mers will be forced out of business
and banks will benefit from
stronger loan holdings.
Agriculture is much more than
food: it includes cotton, wool,
forest products, tobacco,
greenhouse products, and many
others. About one-fourth of
prescription drugs contain an
agricultural product. We use about
20 pounds of paper per person
daily. People spend $5 billion a
year on cat and dog food.