Sunny Side Up: Farm Pride Foods

Merricks Capital’s funds often provide capital to asset-rich, cash-poor borrowers, offering solutions beyond the scope of commercial banks constrained by the current regulatory regime. A recent example of this is the Australian egg industry, which has been dealing with avian influenza disruptions and supply shocks.

• Financing asset-rich processing businesses is part of our specialised infrastructure and industrial investment thematic. Currently the opportunity is to target downstream supply chain assets emerging from the inflationary pressures of the past few years (labour, power, and commodity costs) with more normalised 2024/25 operating margins.
• At a macro level, we expect inflation to continue to be curtailed, driven by China’s economic woes, Australia’s GDP recession on a per capita basis, and anticipated RBA rate action. While the next few months may present challenges as the economic pain of crushing inflation is felt, senior secured loans offer the time and protection to see asset backed businesses through the cycle, earning equity-like premium in the process.
• Over the past 12 months, Farm Pride Foods Ltd (ASX: FRM), a borrower of Merricks Capital’s funds, has undergone a significant operational and financial turnaround, highlighting how private credit can stabilise asset-backed businesses in volatile environments.
• Farm Pride recently reported a year-on-year EBITDA improvement of $7.3m, representing a 2x interest coverage ratio for senior debt. In June 2024, we extended their $12.6m senior debt facility for 18 months, secured against a collection of farms in Victoria and NSW (on a LVR of less than 55%).
• A key factor in extending the loan was the egg industry’s supply-demand imbalance, even before the avian influenza outbreak, which led to the culling of over a million chickens (~5% of the flock). Producers report that supermarkets have accepted 15-25% price increases in 2024 to incentivize rapid restocking and maintain supply amid widening gaps.

Farm Pride is one example of a broader, growing private credit opportunity for downstream assets we’re seeing emerge where private credit can partner with these businesses as they enter a more normalised trading environment that is less driven by inflationary pressures.