Seasonal Agribusiness Term Loan Restructure
Northline Grain Co. is a family-owned grain elevator and inputs supplier. FY2024 revenue was $18.4 million, EBITDA $2.1 million, interest expense $520,000, and the existing $6.5 million term loan amortizes $650,000 annually. The borrower reports DSCR of 1.05x on the bank's template, but the calculation treats a $300,000 annual shareholder distribution as an operating expense and adds back a $250,000 one-off insurance gain. Cash taxes are $180,000 and maintenance capex is $150,000. Receivables are 75 days, inventory peaks at $4.2 million during harvest, and the bank holds a first lien on equipment appraised at $7.8 million (orderly liquidation value $4.7 million). The owner requests an additional $1.2 million term loan to fund a storage expansion. Policy requires minimum DSCR 1.25x, maximum total debt/EBITDA 3.5x, and collateral coverage at 1.25x on forced-sale value. The relationship is otherwise profitable, and the owner offers a personal guarantee backed by net worth of $2.3 million, mostly a residence.
1. Recalculate DSCR and total debt/EBITDA under bank policy. Does the existing loan comply, and does the $1.2 million request?
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Start by normalizing EBITDA. The $250,000 insurance gain is non-recurring, so policy EBITDA is $2.1m - $0.25m = $1.85m. The shareholder distribution is not an operating expense for EBITDA, but it is a cash use in DSCR. Policy DSCR = (EBITDA - cash taxes - distributions - maintenance capex) / (interest + scheduled principal). That gives ($1.85m - $0.18m - $0.30m - $0.15m) / ($0.52m + $0.65m) = $1.22m / $1.17m = 1.04x, not 1.05x and below the 1.25x minimum. Existing leverage is $6.5m / $1.85m = 3.51x, already marginally above the 3.5x cap. The new $1.2m loan at 8% interest-only adds about $96,000 of interest, raising debt to $7.7m and leverage to 4.16x. DSCR falls to $1.22m / ($1.17m + $0.096m) = 0.96x before any amortization; with 10% amortization it is worse. Collateral coverage is $4.7m forced-sale value / $6.5m = 0.72x, also below 1.25x. Conclusion: the existing facility is out of policy on DSCR, leverage and collateral, and the request materially worsens all three. The guarantee is not a substitute because the net worth is mostly an illiquid residence.
2. Identify the most material credit weaknesses and propose an approval structure, if any, that fits policy or a controlled exception.
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The main weaknesses are weak normalized cash flow, high leverage, insufficient forced-sale collateral, seasonal working-capital peaks, and the owner's annual distribution competing with debt service. The storage expansion may be strategically sound, but it does not generate near-term cash flow and should not be funded with incremental term debt at this leverage. A policy-fitting structure would be a modified approval, not the requested loan: apply the $250,000 insurance proceeds to the term loan, require at least $300,000 of owner equity into the project, and offer a $500,000 seasonal revolver secured by a borrowing base of 70% of eligible receivables and 40% of eligible inventory, with a 30-day clean-up period. Add a springing DSCR covenant of 1.20x tested quarterly, annual financial covenants, a first lien on the guarantor's residence if legally permissible, and a cash sweep if DSCR falls below 1.10x. If the bank makes an exception, classify the relationship as special mention, document the rationale, set a timetable for deleveraging, and require the owner to suspend distributions until DSCR reaches 1.25x. Do not approve the $1.2m term loan as requested.
3. How would you communicate a decline or modified approval to the owner while protecting the deposit relationship?
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Meet privately, lead with the relationship and the bank's willingness to support the harvest cycle, then present the numbers in plain language: normalized EBITDA, DSCR, leverage and collateral coverage. Avoid blaming the borrower or hiding behind policy. Explain that the expansion is a good long-term investment but that adding $1.2m of term debt would push DSCR below 1.0x and leverage above 4x, which the bank cannot support. Offer the positive alternative: applying insurance proceeds, contributing equity, and using a seasonal revolver with a clean-up. Ask for a three-year cash-flow plan and discuss whether the project can be phased. Keep the deposit and treasury services separate from the credit decision so the owner does not feel the whole relationship is being withdrawn. Confirm the discussion in writing, including conditions and next steps, and set a review date. If the owner escalates, involve a senior credit officer rather than negotiating new terms in the branch.