1. © 2012 Baird Holm LLP Agricultural Lending Counterparty/Third Party Risks: What You Don’t Know or Didn’t Plan For Can Be Bad Jacqueline Pueppke ICBA Annual Conference Nashville, Tennessee

2. © 2012 Baird Holm LLP Who? What? Why? How? Counterparty/Third Party Risks

3. © 2012 Baird Holm LLP The “Who”: Identify Third Parties and Counterparties Other Lienholders Parties with Control or Possession of Collateral Parties with Claims to Collateral Counterparty/Third Party Risks

4. © 2012 Baird Holm LLP Governmental Entities Other –Letters of Credit Beneficiaries –Subordinated Debt –Loan Participants –Commodity Brokers Counterparty/Third Party Risks

5. © 2012 Baird Holm LLP The “What”: Identify Third Party’s Interest and Risks Lien? Contractual obligation? Control over the collateral? Counterparty/Third Party Risks

6. © 2012 Baird Holm LLP The “Why”: Why should I care? Risks and interests impact: Borrower Operations Borrower Cash Flow/Debt Service Lender Loan Enforcement Lender Collateral Counterparty/Third Party Risks

7. © 2012 Baird Holm LLP The “How”: How Do I Manage/Control Third Party and Counterparty Interests or Risks? Loan Structure Loan Documentation Counterparty/Third Party Risks

8. © 2012 Baird Holm LLP Other Lenders Who: Identify other lenders to your borrower What: –Identify interest in your collateral –Risks even if loan is unsecured Counterparty/Third Party Risks

9. © 2012 Baird Holm LLP Why should you be concerned about other lenders? –Repayment of Debt –Enforcement of Lien on Collateral Counterparty/Third Party Risks

10. © 2012 Baird Holm LLP How Do I Mitigate the Risks of Other Lenders? –Control Agreement for Deposit Accounts –Subordination Agreement Debt Subordination Collateral Subordination Counterparty/Third Party Risks

11. © 2012 Baird Holm LLP How Do I Mitigate the Risks of Other Lenders? –Intercreditor Agreements Consents Notices Collateral issues Priority Enforcement issues Access to Collateral Counterparty/Third Party Risks

12. © 2012 Baird Holm LLP Statutory Claims or Liens Who: Identify third parties who may have statutory liens on the collateral What: Identify the statutory liens –Ag Liens –Processor Liens –Producer Liens Counterparty/Third Party Risks

13. © 2012 Baird Holm LLP Why should you be concerned about statutory liens? –Priority –Enforcement of Lien on Collateral Counterparty/Third Party Risks

14. © 2012 Baird Holm LLP Commodity Accounts Who holds the account? What interest does that person have in the account? How? –Control Agreement Counterparty/Third Party Risks

15. © 2012 Baird Holm LLP As additional security for the obligations of the Debtor to the Secured Party, and for the payment of all monies which the Secured Party may hereafter loan or advance to the Debtor, the Debtor hereby grants a security interest in and assigns and transfers to the Secured Party all hedging funds which may hereafter accumulate or become withdrawable from or paid out of the hedging account of the Debtor with the Broker, including any balance which may remain to the credit of said account upon the closing thereof; subject, however, to the prior payment of all indebtedness of the Debtor to the Broker, as such may exist from time to time, including fees and commissions, which may have been incurred in connection with Debtor's transactions with Broker, and to Broker's lien, and the right of foreclosure thereof in connection with any indebtedness of Debtor to Broker (including any right of Broker to close out open positions without prior demand for additional margin and without prior notice). Counterparty/Third Party Risks

16. © 2012 Baird Holm LLP If, at any time during the continuance of any futures contract or contracts in the Account, the Broker may require additional margin with respect to such contract or contracts, the Secured Party will promptly advance to the Broker on behalf of the Debtor such amounts as may be requested by the Broker or enter appropriate liquidating orders… Counterparty/Third Party Risks

17. © 2012 Baird Holm LLP Landlords Where: Location of collateral? –Leased Real Estate –Pasture –Feedlots –Storage Facilities Counterparty/Third Party Risks

18. © 2012 Baird Holm LLP Who owns the property where the collateral is located? What rights do you have, as the lender, to access that property? How to mitigate the risk: –Collateral Assignment of the Lease –Access Agreement –Landlord Consent Counterparty/Third Party Risks

19. © 2012 Baird Holm LLP Case Study: The Cheese Manufacturing Plant Counterparty/Third Party Risks

20. © 2012 Baird Holm LLP Third Parties with Contractual Obligations Who? –Milk Supplier –Cheese Buyer Why should I be concerned? Counterparty/Third Party Risks

21. © 2012 Baird Holm LLP How Can I Protect My Bank’s Interest? –Due Diligence on the counterparty –Collateral Assignment of the contracts Counterparty/Third Party Risks

22. © 2012 Baird Holm LLP Third Parties With Contractual Obligations Examples of Other Contractual Obligations: –Marketing Agreements –US Government Contracts – Assignment of Claims Act –Construction Contracts Counterparty/Third Party Risks

23. © 2012 Baird Holm LLP Tenants Who are the tenants? What? –Portion of property occupied? –Terms of the Lease? Why? –Does tenant’s lease hurt your ability to re-sell the property after foreclosure? Counterparty/Third Party Risks

24. © 2012 Baird Holm LLP Cheese Manufacturing Plant Whey Equipment and Leased Area Counterparty/Third Party Risks

25. © 2012 Baird Holm LLP Tenants How? –Subordination Agreement –Subordination, Nondisturbance and Attornment Agreement Counterparty/Third Party Risks

26. © 2012 Baird Holm LLP Title Insurance Carefully review the list of specific exceptions –Covenants? –Restrictions? –Easements? –Leases? Counterparty/Third Party Risks

27. © 2012 Baird Holm LLP Title Defects –Title defect exists if a third party claims an interest which interferes with the insured’s use of the property –Examples of defects: Property transferred through probate and transfer deed was not executed by all heirs; improperly acknowledged real estate transfer documents; conveyances by minors or incompetents; or conveyances by one spouse where the acknowledgment and consent of both spouses was required. Counterparty/Third Party Risks

28. © 2012 Baird Holm LLP How to Handle Title Defects (cont.) –Deal with any issues at the commitment/preliminary report or pro forma policy stage –If issue comes to your attention after issuance of policy – you need to provide notice immediately to the title company at the address set out in the policy (not the address of the local title agent) Counterparty/Third Party Risks

29. © 2012 Baird Holm LLP Water Who Controls the Water Supply? What? –Available Water Supply –Access to Water Counterparty/Third Party Risks

30. © 2012 Baird Holm LLP How? –Water Due Diligence Required Amounts Sources of Water Security Interest in Water “Rights”/“Allocations” Counterparty/Third Party Risks

31. © 2012 Baird Holm LLP Governmental Entities What? –Permits Necessary for Operations –Environmental Counterparty/Third Party Risks

32. © 2012 Baird Holm LLP Governmental Regulatory/Permit Dairy Example –Permits Operating Permit –Producing market milk Separate permits needed for processing or distributing milk; bulk milk hauler tanker; and bulk milk tank sanitizer NPDES Permit for wastewater discharge –Application requires nutrient management plan and annual reporting Air Quality Permit Counterparty/Third Party Risks

33. © 2012 Baird Holm LLP Dairy Farms (cont.) –Federal CAFO Regulations Nutrient management plan Manure application rate limitations Soil sampling Equipment and operation inspections Setback requirements Limitations on wastewater discharge Depth marker –Sanitary Regulations Inspection by state agencies (failure to pass inspection may result in restriction of operating permit or exclusion of milk) Counterparty/Third Party Risks

34. © 2012 Baird Holm LLP Governmental/Environmental –How? Determine and Verify Permits Environmental Reports/Investigations Assignment of Permits? Counterparty/Third Party Risks

35. © 2012 Baird Holm LLP Participation Agreements/Syndicated Loan Documents Lead Banks –Rights/Obligations Participants –Rights/Obligations Counterparty/Third Party Risks

36. © 2012 Baird Holm LLP Letters of Credit Reimbursement Agreement/Obligation Terms of the Letter of Credit Collateral for Letter of Credit Counterparty/Third Party Risks