Before the recession and downtrend in the equine industry, loans for horse owners were much easier to obtain from local banks. Then things changed.
“I believe there is currently significantly less liquidity in the equine lending market than there was three or four years ago,” said Robert Beck, who practices equine law at Stites & Harbison.
“At least one of the significant lenders has exited the market, one of the smaller lenders has reached capacity, and all of the other banks have tightened their requirements,” he added.
Michael Meuser, who practices equine law at Miller, Griffin & Marks, agreed.
“The banks are still doing some equine loans, but obviously not as much as there once was,” he said. “We’ve seen a contraction in the horse business. There’s not as much activity, and there are fewer horses.”
“Equine lending is not as big as it used to be, when the industry was larger in 2006-’07,” said Peter Costich, equine lending officer at Fifth Third Bank. “But it’s still there, and we’re looking to do business. It’s definitely still around.”
Beck sees the lack of available loans for people in the horse business as “directly related to the contraction of liquidity in the entire economy, which is directly related to the economic downturn, which began in 2008.”
While banks are granting some equine business loans, “most of the transactions I observe currently are renewals or modifications of existing credits. Also, most involve real estate as security. I believe the loan demand has declined,” said Beck.
“The key factors in acquiring equine loans currently seem to be a long-time relationship with the lender, a demonstrable history of positive cash flow significant enough to amortize the loan and in many cases, the availability of non-equine collateral such marketable securities,” he added.
Meuser said, “I still have a number of clients who have equine loans with horses as collateral, who use lines of credit to purchase bloodstock. For people who have the ability to secure these loans, they’re still available.”
Costich said that “equine lending, like other types of lending, depends on the creditworthiness of the borrower. Our criteria would be the same as for any other type of loan.”
Equine loans “run the gamut,” Costich said. While primarily on the Thoroughbred side of the business, the equine industry borrowers who are his customers request loans for various purposes. Equine loans might be for new horses, stud fees or stallion shares. The horse business is cyclical, so owners sometimes need loans to cover operating expenses until yearlings and other horses are sold in the fall or until stud fees are paid in the spring, when foals are born.
Tight, or at least tightened, credit will likely continue for the equine industry. The general economy hasn’t improved significantly, and horse sales are still down.
“I anticipate that liquidity in the equine business will not increase significantly until the overall economy improves,” Beck said.
Asked about future equine lending, Costich said, “I wish I had a crystal ball. I don’t see major changes — maybe a gradual uptick.”
“We’re seeing a stabilization in the market, perhaps a slight improvement, but we’re looking at a while yet before we see [the effect of] fewer foals on the market and supply and demand evening out,” he explained.
“The Thoroughbred market is coming back. Credit generally in this country is a result of everything we went through in the economic crisis,” Meuser said. “We’ve had some good sales, with increases in the median and average prices.”
“If this trend continues it will help on the equine lending side, but it’s a little early to tell,” he said, noting the negative competitive impact of breeders’ incentive funds that other states pay and Kentucky doesn’t.
So horse owners, especially those in the Thoroughbred segment of the industry, have to be cautious as the general economy and their particular market work through the down times. With loans less readily available, farm owners have been trying different strategies. One such strategy is to be more selective in acquiring and breeding horses. Another approach is to seek loan funds elsewhere.
Both equine lawyers could relate to these strategies.
Meuser said that his clients tell him that “if you have a really good horse, it will bring a fair price. If it’s not a good horse, it won’t bring anything, so you have a feast-or-famine situation.”
“I do believe that some horse industry participants are gravitating to non-traditional lending sources such as hedge funds or private equity funds,” Beck said.
The equine business has its practical side, with daily capital required for vet bills and hay, trainer’s fees and fence repair, but it’s also a business built on dreams. Is it still possible for someone to secure a loan to get started in the horse business?
“Of course it’s possible, but most of the equine lenders are looking to be sure borrowers have the ability to repay,” Meuser said.
“Absolutely,” said Costich.