In a follow-up to yesterday’s article “Safety nets or self regulation: What should happen in the event of grain insolvencies?”, today we look at credit management on grain sales, and tips from financial experts on actions growers can take to mitigate against insolvency risks.

Credit management on grain sales

A seller needs to focus first on avoiding getting into a position where the buyer of their goods will not pay them.

Know your buyer

Five points to keep in mind:

1. Continually talk to people about trade and payment issues
2. Know the GTA trade rules
3. Limit tranche size on transactions
4. Make sure money does come in when it should
5. Consider a tighter payment timeframe

 

1. Continually talk to people about trade and payment issues

Do not ‘set and forget’ as sale once it is made.  Keep open your conversations with anybody about how your buyer is travelling because any conversation may be a window into the state of their ability to pay you.  When you are talking to your buyer during the time that the contract is ‘live’ get into the habit of making a note of what was said, and if you both at some later time agree to alter any part of the contract, write down the alteration and send it to the other person.  Email is good, text is OK, any kind of written thing is really handy if there is a problem later.

 

2. Know the GTA Trade Rules

These rules (link here, version dated 20 October 2015 about 420 KB 19 pages) specify parties’ obligations.  The important aspects of the trade rules as they relate to credit management start way back at the time and in the method with which you structure your contract with your buyer.  Careful consideration of where delivery is to take place, when (is it buyers’/sellers’ call or even spread?) and who is to organize the transfer of title of the goods, and payment method are things that you and the buyer need to both be clear about at the time of contracting.  Many other aspects are treated as ‘given’ in the way they are laid out in the GTA Trade Rules. The Commonwealth Personal Property Security Act 2009 entitles you to significant protection if you use it properly.  A link to the Commonwealth Government PPSR business guide is at the bottom of this article. When you take out a GTA contract you should then create an entry on the register (PMSI).  The guide explains the meaning of terminology, ‘perfecting the security,’ – do not wait until insolvency occurs.  

 

3. Limit tranche size on transactions

Limiting the size of sale parcels need to be balanced with the way you judge the riskiness of dealing with any of your buyers.

 

4. Make sure money does come in when it should

If payment terms were 30 days from end of week of delivery (EOW) and a payment has not been received by the due date take some action.  Speak to the person and write down what they said.

 

5. Consider a tighter payment timeframe

The payment period you negotiate with your buyer can be any practical terms you agree on at the time of writing the contract depending on your attitude to cash flow and exposure.

 

How to deal with events after an insolvency has occurred

A comprehensive analysis on managing insolvency in the grain industry was written by financial expert Malcolm Finlayson of Finesse Solutions and is published on the GTA (see link here) website.  Insolvency is a challenging time for all and a steady hand is called for.

Mr Finlayson explains primary risks in a grain insolvency thus:

There are two main risks in a grain insolvency – delivery risk and market exposure risk.

The delivery risk is the loss of product that has been delivered to the counterparty. It is the value of the receivable.

 The other, less obvious, risk is the market position created by the loss of the contract. Usually this is the long or short that occurs in your position for the market movement in price from the original contract price to the market price where you close the position out.

 The first risk is obvious each day from review of your receivables but the second is not as obvious unless you run a counterparty position report.

 A counterparty position report shows the exposure you have on all counterparty contracts against the current market. It shows the risk you bear if they were to default on their contract obligations.

Eventually, if a seller finds itself having traded with a buyer which later becomes insolvent, here is how Mr Finlayson’s paper describes how to deal with the events:

Find out if the talk of insolvency is real

If you hear a rumour of insolvency find out. The sooner you know the sooner you can begin reducing your exposure. Talk to the company or check with the ASIC website to see if an administrator has been appointed. If you have received a communication from the company or administrator, read it carefully. The date you become aware of an insolvency is important!

Correct your position

The loss of a contract will create a market position for you. Although you have a right of washing out the contract, the price you use may not be the price you achieve in the market. Sometimes a major player’s insolvency may dramatically move the market price and a day’s difference could be enormously expensive. If you are running a MTM reporting system, perform your washout and remove the old contract from your position reporting to correctly state your exposure.

Calculate your washout

This is the difference in the market price to the contract price on the day following either: (i) the day of notice from the administrator or the day you first became aware of the insolvency event; or (ii) the day of the event of insolvency. The market price used needs to be for the same commodity for the same delivery period and for the same delivery point. I strongly recommend that your supporting documentation for the washout has all of these characteristics being identical, even if it is more effort for your preparation of the support. The washout invoice is not subject to GST as it is a financial instrument and it can be in your favour or the insolvent party’s.

Submit your claim

The administrator will have a form that you need to complete that substantiates your claim as a creditor. Your receivables, including washout invoices, are part of the supporting documentation. I encourage you to include the invoices themselves, proof of delivery and copies of the signed contracts. Proof of the market prices on the day of washout is also essential. Most people use a broker confirmation of the market prices.

Attend (creditor) meetings

Under section 436E(2)of the Corporations Act, the first creditor meeting must be held within eight business days after appointment of the administrator and there must be five days’ notice. This is the only effective opportunity to replace an administrator with someone better qualified. It is also a valuable source of knowledge of what is going on, and allows you to see what other counterparties may have ripple effects from an insolvency event. (Editor note : this paragraph has been updated at Mr Finlayson’s notification that there has been a change to this section of the Act about the timing of the first creditor meeting).

Try to get an expert appointed to the creditor committee

The creditor committee is an inexpensive means of helping the administrator to understand what happens in the business and how to improve the chance of recovering the funds. It is a complicated process and often administrators have no, or little, experience in the grain industry. They may not be aware of issues that can dramatically alter the distributions that can be achieved.

Continue to pursue

After the administrator has been appointed and meetings held, it is important to continue to work on your risk. As a minimum, continue to liaise with the administrator regularly. Do you have any of your mitigation steps that you need to work on? Are you taking steps to recover costs from any personal guarantees?

 

You need to interpret carefully everything you see or hear.  What you do and when you do it will become important in your final wash-up of mitigating losses from an insolvency.

 

This information is general in nature and is not to be taken as financial advice. Readers should consult a specialist for information of relevance to their own specific situation.

Hyperlink here to PPSR business guide (approx. 4.7 mB 52 pages).  See also article today on Grain Central contributed by lawyer Ben Mackay here