In the past six months, the Thoroughbred industry has been rocked by one multimillion lawsuit after another. Altogether, Central Kentucky banks are suing horsemen for at least $54.4 million.
By some estimates, that would be equivalent to 5 percent to 10 percent of the equine lending market tied up in troubled debts, a potentially significant stone around the neck of an already struggling horse industry.
Each lawsuit is unique, but one thread runs through them all: The loans were collateralized with horses.
So to pay the loans off, horses will have to be sold. How much the banks recover will depend on the Thoroughbred market, which has lost at least 40 percent of its value in the past two years.
Fasig-Tipton's July sale will kick off the 2010 yearling sales. Boyd Browning, president of Fasig-Tipton, said there are reasons for optimism but he estimates the credit market is at least as tight now as it was in 2009.
"That diminishes some people's buying capacity, without question," he said. "If you have less available capital to be spread throughout the marketplace, there are fewer dollars to be bid."
That creates a "vicious cycle," he said. "When capital constricts, ... it has a negative impact on the market, which accentuates the problem."
Equine attorney Bob Beck, chairman of the Kentucky Horse Racing Commission, has been involved in some of the biggest deals in the horse business, including the record-setting syndication of Kentucky Derby winner Fusaichi Pegasus and the purchase days before the 2009 Kentucky Oaks of winner Rachel Alexandra. His law firm, Stites & Harbison, has handled the purchase, sale or syndication of more than $600 million in bloodstock in the past 20 years.
Times are different these days.
"My understanding is the availability of financing has been cut by at least 50 percent," Beck said. "We appear to have lost about $500 million worth of liquidity in the market. That's pretty serious stuff."
The problem is more serious now than even a year or 18 months ago, he said.
"One of the things that happened is when the credit crunch hit, the banks sat back and waited to see what the next sales cycle would do," Beck said. "We've been through that cycle, and prices have obviously dropped."
Farms that relied on lines of credit for operating capital have had those lines cut in half because the value of the collateral — the horses — has fallen.
If a significant portion of the farm's credit was already tied up in stud fees, then even selling the horses might not be enough to keep them going.
"The primary event that needs to occur (to right the industry) is for the prices in the market to return to some sense of normalcy," Beck said. "If the market turns back up, the lending relationships will get a little softer."
Another prominent equine attorney in Lexington, Mike Meuser, said that last year's sales were a harsh reality check for the market, but this year's will be even more critical.
"This is the sale that's going to be difficult and telling," Meuser said.
Yearlings for sale this year were bred in the spring of 2008, when stud fees were at all-time highs. In many cases, those high stud fees have yet to be paid off.
"The banks are upside down, the stud farms are upside down, there's no way to get everybody paid," Meuser said.
He said that based on his observation, the actual number of problem loans is much greater than the few high-profile cases so far."For every one of those loans in litigation, five to 10 are being managed in a 'work out' situation," he said, where banks are calling on customers to either pay down loans or increase collateral. "On a bunch of occasions, I've had clients come to me who are essentially renegotiating their position with their lender."
Many people are in a holding pattern right now, said fellow attorney Andre Regard.
They can't repay the loans they have until they sell some horses; they don't want to sell in a down market and few people can get new loans to buy horses.
Equine credit "is very, very difficult to get and you're only going to get it if you can show an alternative source of income," Regard said.
"Equine lending as we've traditionally known it is over with. ... My experience is they're not going to loan money just on horses right now."
Read more of this story at Kentucky.com
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