Current Trends in Lending

Mark Thompson is one of two executive directors in the business and runs the credit committee. UK Agricultural Finance began with just three people and they all did every job in the business – from visiting the loans, doing the underwriting, loan administration, to making the coffee and painting the office. The firm’s now based on a farm in Kent, in a (very nice) converted grain store and has almost 20 members of staff, including four business development managers who are based in Devon, Gloucestershire, East Anglia and Northumbria.

We hear from Mark below on recent trends in lending and what the future holds for the sector.

Our main product is a variable-rate, interest-only, commercial loan secured on agricultural or rural land and buildings in England, Wales and Scotland. We have financed a wide range of businesses and look to find solutions where others might not. As such, we are able to consider multiple assets for security, as well as looking at a borrower’s entire income, rather than limiting ourselves to the on-farm income.

In one instance, seven different income streams were used to support a borrower’s case: on-farm income from a small beef herd, conventional contract farming, buy-to-let income, a council hedge cutting contract, PAYE as a part-time fireman, dividends from the family (non-farming) business and their spouse’s PAYE income as a primary school teacher.  This makes for a complex credit committee proposal, but also allows us to fund many first-rate borrowers who would otherwise not be able to secure reasonably priced loans.

Our average loan size is approximately £1 million, which coincidentally is our 60% LTV limit applied to the average value of a farm in the UK.  However, the range runs from £100k up to £5 million at the moment, and our largest loan to date was £7 million, with the ability to go up to £10 million.

While our loans are more expensive than the High Street, we’re not trying to replicate their business model, but rather find solutions for a borrower to either create and release value from their business, or to put them in a position to subsequently secure cheaper High Street lending.

Part of our service includes visiting every single borrower in person, before lending, so we can thoroughly understand their business and they have a known person to contact in future.  We don’t have an arbitrary age restriction on our lending and as a result, we’ve refinanced several borrowers where their age has prevented the High Street continuing to lend, despite a 40-year+ unblemished track record with that bank.

Some of our more interesting loans have included several renewable energy projects, where the borrower wanted to own the entire asset, rather than just receiving rent from the land used.

These include a £4 million construction loan for a run-of-river hydropower project and its subsequent refinance with us to an operating business loan, that worked with the borrower as they went through the usual commissioning headaches, followed by several dry summers and delayed Ofgem payments.  This was secured against a normal family farm, as we could tranche payments as the project proceeded and we understood the issues they faced.

At the opposite end of the spectrum, we funded a smaller loan for the installation of ground source heat pumps by one of the largest poultry businesses in the country, but whose High Street bank was unable to act quickly enough to enable them to secure a government Renewable Heat Incentive contract.

We see the usual range of loans tied to inheritance, family farm structures and, sadly, divorce.  Currently, we’re funding both sides in a divorce, to enable both borrowers to grow their respective farms, but also help them escape a predatory lender.

Over the last few years, we have had a steady inflow of Class-Q planning related development loans and an increase in farm-diversification lending, which ranges from the relatively common addition of glamping pods, through the purchase of the village pub, to vineyards, to nature reserves and even the conversion of a Norman Keep to an educational facility.  Our expertise has included funding Agricultural Holding Act tenants with a right to buy, as well as dealing with the more common agriculturally tied properties.

In addition to a growth in farm-diversification, two other trends have stood out to us. The first being increased referrals from High Street bank managers, where they have good quality borrowers that they can’t get internal approval for, typically because the borrowers are either changing the focus of the farm, such as converting from beef to dairy, or the borrower has had a challenging couple of years and head office is wanting to dump the loan into the bank’s “business support unit”.

In all instances, these are good-quality borrowers, who just require support and patience, before they can move back to the High Street.

The other more concerning trend is various predatory lending practices from ‘FinTech’ or ‘peer-to-peer’ type lenders, that raised a tranche of short-term money that they rushed out the door without understanding the sector and now are aggressively pursuing repayment, without any recognition of the farming cycle.

Looking forward, our farming borrowers have withstood the rising interest rates remarkably well and generally have not over-expanded, even as food prices have shot up. The recent fall in the natural gas price translates into lower fertiliser costs, which historically correlates closely with food prices.

Land prices are holding up well and where we’ve had sight of exit valuations, these have almost all been ahead of the Red Book valuation, helped by a relative scarcity of land being sold.

With the recently announced new line of £300 million, we’ve seen strong demand from good-quality applicants for our main-term lending and high-quality bridge products. Later this year we expect to announce two new products aimed at helping farmers solve some of the sector’s big challenges: an ageing workforce and a lower-cost solution to inflexible High Street lending.