By: Nigel Stirling
NZ Farmers Weekly
6 Dec, 2019
The Australian fund manager behind the refinancing of $140m of Van Leeuwen Group bank debt says it is just getting started in New Zealand.
Merricks Capital is an established lender on farms and property development across the Tasman with $5 billion of assets under management for pension fund clients and the super-wealthy.
The refinancing of the embattled owner of 11 South Island dairy farms is its first foray into the NZ lending market.
The Sydney-based investment manager is moving in just as the big banks are preparing to rein in their lending to farmers in response to hikes in regulatory capital confirmed by the Reserve Bank last week.
Chief executive Adrian Redlich said there are plenty of opportunities in the $63b of farm debt owned by the big banks.
“Our view is that for them under the new rules there probably needs to be $10b plus of alternate lending over the next five years.“Our ambition over the next year or two is potentially to lend a billion dollars and maybe over five years to do several billion.”
Three more farm refinancing deals are already in the works. Those loans are smaller than the Van Leeuwen Group deal.
“While that loan was a good size and allows us to deploy capital more rapidly we do have dairy loans in Australia of $7m or $8m.
“There is some complexity around NZ at the moment but we are happy to look at $15m to $20m plus loans in dairy and we are doing just that.”
However, borrowers will pay more than the 4% to 5% banks have been charging for first mortgage lending secured on farms.
“We will be more akin to the finance companies,” Redlich said.
In return it would lend more and on more flexible terms than the banks.
“We may have loans where the interest rate can actually vary with the milk price or interest maybe capitalised to allow for expansion.”
Redlich said the outlook for NZ farmers is good but they are being put in a difficult situation where increasing regulation is asking them to sink more investment into their farms just as the banks are pulling funding.
In the case of the Van Leeuwen Group as well as refinancing its existing bank debt Merrricks is providing new funding for robotics and other farm improvements.
Redlich said the investors in his funds are comfortable funding those investments if they boost productivity of the assets their lending is secured against.
“If a bank is unavailable to provide the working capital to make that adjustment then it is going to be challenged.”
Redlich said raising new capital from investors to lend to NZ farmers will not be a problem.
He anticipated farm loans will generate returns of 4% to 5% above the return investors can get from owning relatively risk-free assets like government bonds.
At the same time the outlook for the assets the loans are secured against is sound.
Redlich said NZ farmers are recognised as among the most efficient in the world and their profits are being underpinned by subdued production increases among competitors.
“Owning NZ farmland has been aspirational for a lot of these groups.
“Now they have the opportunity to partner and generate a good, solid almost equity-like return from supporting the industry as debt.”