Economy's Latest Victim

[BlazingColours]

A sum of all the issues facing the TB industry...

Link posted here http://www.bizlex.com/Articles-c-2010-0 ... nance.html and copied for all to read.
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Lexington, KY - Some call it a crisis. Others refer to it as a bump. Some see it as a correction. Others think it's the sign of the apocalypse. Whatever it's called, the credit crisis has hit the equine industry. Equine bankers are not talking about it on the record but their institutions have tightened, if not frozen, equine lending.

According to the Kentucky Thoroughbred Association's David Switzer, two years ago there was $1 billion in lending for the equine industry in Kentucky. That's been trimmed in half, and signs indicate it will get trimmed further.

Two major equine lenders in Lexington – Fifth Third Bank and PNC (formerly National City) – have restricted or are phasing out equine lending. A third key lender, JP Morgan Chase, has not gone that route. "Chase's Equine Business grew quite a bit last year and we have every intention of continuing to prudently grow in 2010 and beyond," stated Don Hellmann, president of Chase in Central Kentucky.

When big banks swallow little banks, when lending decisions go to a national boardroom rather than a local tackroom, things change. The horse business is a business unto itself, one with panache and risk, great success and utter failure, one that fascinates insiders and exacerbates outsiders.

Want numbers?

The Kentucky equine industry impacts the state of Kentucky to a tune of about $4 billion. It provides around 100,000 jobs and highlights the $8.8 billion state tourism trade. And it has been the leading agriculture cash crop for Kentucky — until now. University of Kentucky agricultural economist Lee Meyer has predicted that 2009 receipts from the poultry sector will top those of the horse industry by about $180 million.

That's chickens outpacing horses. In Kentucky.

In 2007, Keeneland coined over $815 million in gross sales from its Thoroughbred auctions. In 2009, that number failed to reach $400 million.

"It's one of the most significant issues in the Thoroughbred market, and it may surprise people to hear that, but this is a business just like any other business. And to a large degree, capital and access to capital is what keeps the business engine moving," Keeneland President Nick Nicholson said. "When you have an economical environment (where) capital is relatively easy to obtain at relatively favorable rates, it makes everything else easier. When you have an environment (where) capital is difficult to obtain — or in this instance, it's difficult to obtain at any rate — it makes everything else more difficult."

When the Thoroughbred market falters, the value of the collateral used for loans (typically horses) decreases, which stifles lending. This halts liquidity of capital, which crashes the market.

The credit crunch affects the horsemen, especially the farmers who raise and sell horses for their livelihood, but it also affects the core of Lexington. Less money spent in the horse industry, means less money spent at Malone's, Rupp Arena and Joseph Beth — never mind the real estate market and the state's tax coffers.

"Things are a lot tighter in the market. There are some banks that have advised their clients that they're no longer interested in equine loans, and it's created a liquidity shortage," said Bob Beck, an attorney with Stites & Harbison in Lexington and a Thoroughbred owner. "With some banks, it's every kind of lending; they would normally be making acquisition lending for horses, real estate, operating lines of credit. Some of them have just indicated that they're not in that business any longer."

The Thoroughbred sales market has dropped about 40 percent in the past year. The stallion season market has plummeted. The number of mares being bred has decreased, and many others have moved from Kentucky to states with more vibrant breeding programs. When the value of bloodstock put up as collateral against loans weakens (that collateral is worth half of what it was a year ago), banks worry. Especially, when there is no quantifiable end in sight. Sure, things will get better. But when, how much and what happens in the meantime? That's the $500 million question.

"What do we need? We need capital, so the pinhookers can do their thing and the farms can operate," Switzer said, two days before meeting with a representative of the Federal Reserve. "The banks aren't willing to lend the money like they used to. It's not just for the horse industry. It's all small businesses. Without money being available — well, I shouldn't say that. The money is available; they're just not loaning it. They're stifling the economy, so people aren't manufacturing, so there aren't any new jobs. It's all based on the fact that banks aren't lending money."

Thoroughbred racing faces the perfect storm. Racing's business model is flawed. The antiquated betting system and exorbitant takeout from handle handcuffs racing, making it hard to compete with other types of gambling. In some states, racing has been propped up by money siphoned from slot machines, the short-term solution that has bolstered Pennsylvania, West Virginia, Delaware and other states while leaving states like Kentucky struggling to compete.

The battle for slots, the need for a more competitive system of gambling, plummeting attendance and other issues — equine injuries, illegal drugs, horse slaughter — had racing reeling. Now, add world financial misery to the mix, along with a credit squeeze.

"We're in major trouble right now; the only way we can get out of it is if we can get a level playing field to operate. You can't expect any business to thrive if they can't compete with their competition on a level playing field." Former Kentucky Governor and farm owner Brereton Jones said. "Why would you want to loan to a business that, if they can't get that part straightened out, their chances are way less than 50 percent? What banker is going to put his money in that kind of deal? I can't, as a businessman, suggest to my friends — or even myself — that I need to borrow more money to put into a bad model."

Like all businesses in 2009, money is tight, and lending is tighter. Beyond slowing down or freezing lending, banks are calling in loans quicker.

"Banks are saying we don't see it getting any better. They're calling their chips," said Lexington equine attorney Mike Meuser. "Historically with collection issues, the stud farms and the banks have been very patient. They've worked with people, because we've gone through these little ups and downs in the horse business. The thought has always been, 'Work with them; get to the next sale.' I don't think anybody has that feeling anymore. We're in a different world now."

On December 15, Fifth Third Bank filed suit against Zayat Stable's Ahmed Zayat, alleging that the prominent racehorse owner and his entities owe the bank more than $34 million. Zayat has been one of the strongest buyers and players since getting into the sport in 2005. According to the suit, Zayat defaulted on the loans by failing to meet two payments in 2009. An Egyptian businessman who made his fortune in the beverage industry, Zayat owns close to 300 horses and several stallions, including the recently retired Zensational, standing in Kentucky.

Zayat was the first big-name player to be called out, but he is not the only one. Two days after Fifth Third filed suit against Zayat, on Dec. 17, it filed another lawsuit alleging that Thoroughbred trainer and owner Cash Asmussen, who owns Mark Point Stables, defaulted earlier in December on a loan of almost $3 million. According to the lawsuit, the bank is looking to sell horses used by Asmussen and Mark Point as collateral to secure the loan. Industry experts expect that lawsuits against horse owners like these are going to become more commonplace in 2010.

"The banks are in a regulatory environment and under a microscope that they've never been before," Nicholson said. "They are all desperate to enhance their balance sheet, even if they are very confident in the long term that things are going to work out. It's not just the Thoroughbred industry; it's the overall regulatory environment, the microscope, the heat they're all taking right now. You can have a bank like Wachovia disappear in 48 hours. Their world is a very different world than it was five years ago, and that has nothing to do with the Thoroughbred industry."

Like all businesses, the Thoroughbred industry relies on credit to operate. It's a volatile business model at best. Credit is used to buy horses, farm land, equipment. It's used for working capital, a bridge between sales, and to cover payroll, if necessary. Without it, the sport stalls. To fix the market, players need to spend money. But before people will spend money, the market needs to be fixed. The financial trends that evolved in Thoroughbred racing bear some similarities to those of the real estate market, where borrowing became posh. People borrowed aggressively, counting on paying it off with proceeds from sales. The stallion farms acted aggressively, easing the time frame for payment. People borrowed against the value of broodmares. All was going fine until the world economy tanked and the Thoroughbred market followed.

"We've done it to ourselves (by getting into) this ridiculous level of credit extension in this business," Meuser said. "It's just like housing: all the money is borrowed and the prices drop 50 percent, so what are people going to do? They're going to walk away from their loan obligations, and we're seeing the same sort of thing in the horse business. It's bad out there. Most of what I do these days is try to collect money for people in the horse business. I get calls every day to do legal work for people in the horse business. Every call is the same thing — nobody is paying anybody."

The struggling world economy, the struggling Thoroughbred economy and in some cases, regulatory issues and consolidation issues in the banking industry have caused the shackling of loans. It generally takes the Thoroughbred industry three or four years to bounce back from a recession, but that timeframe is predicated on how quickly the world economy improves and how quickly the banking industry rebounds. Keeneland's recently concluded November sale, although down, did show some positive signs.

"It depends when the banks change; it's the chicken or the egg," Beck said. "If the market goes back up and the banks are still maintaining a 50 percent advance ratio and the value of the horses that are used as collateral goes up, then that might free up some additional lending. If the economy as a whole gets stronger and the banks are more willing to lend money, they might look at the horse industry as a place where there is some opportunity."

If and might.

Like all markets, the Thoroughbred industry will suffer until demand outweighs supply. But how many Zayat Stables will fade away in the meantime? Zayat, for example, purchased Maimonides for $4.6 million at Keeneland in September of 2005, Mushka for $1.6 million at Saratoga 2006 and spent over $3 million at Keeneland last September. Zayat owns nearly 300 horses. Of course, Zayat will survive with or without horses, but the real farmers who breed, raise and sell horses for a living — the ones relying on major players like Zayat — what happens to them?

Those breeders who didn't get their horses sold in September and didn't get their horses sold in November are under the gun. The banks are getting stricter and are looking for their money quicker. Without proceeds from sales, the money isn't there. Do all the small people who borrowed money go out of business, leaving only the ultra rich to survive? The ripple effect would extend to real estate, retail and schools.

"A lot of the farms are in trouble right now and don't want to admit they're in trouble," Jones said. "This thing is very, very serious."

Beck made a prediction.

"You are seeing more evidence of people having to file suit to collect for their board fees, their stud fees," Beck said. "If you were to go over to the Fayette County Court Clerk's office, my guess is there would be more collection actions on equine matters than there was a year ago."

A day after Beck made that prediction, Zayat and Fifth Third made headline news.
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[reenci]

obama is leading this country to the poor house......TO MUCH SPENDING.....NOW WERE GONNA TAX THE BANKS... ...yeah they wont pass any fee's on..... ....i swear this moron is doing this shit on purpose ...because nobodys this stupid !

[Georgerz]

I bet that you, as bright and intelligent and educated as you are, will do a thousand times better than Obama. Why don't you?

[reenci]

I bet that you, as bright and intelligent and educated as you are, will do a thousand times better than Obama. Why don't you?

hell... i only have to be a community organizer right ....like i always say....you get what you pay for....fair enough ?

[reenci]

I bet that you, as bright and intelligent and educated as you are, will do a thousand times better than Obama. Why don't you?

it only takes a moron to know that you cant spend your way out of debt......so see even i can figure it out.

[madelyn]

Obama reminds me a bit of my darlin' old mum - except she was Irish Catholic, not Kenyan Muslim.. when I was taking all those business development and project management trips for my IBM Business Partner company she once commented I was lucky that all those big airfares and hotel bills went on my expense account (!?!) She was serious. I pointed out to her that I owned the company and so I "reimbursed" my own expense account. She found that unfathomable. I think Obama has no clue about accountability for debt.

[Linda_d]

obama is leading this country to the poor house......TO MUCH SPENDING.....NOW WERE GONNA TAX THE BANKS... ...yeah they wont pass any fee's on..... ....i swear this moron is doing this shit on purpose ...because nobodys this stupid !

Why weren't you crying when Bush and the Republicans started a war and then cut taxes creating huge deficits???? The economy went in the toilet on the Republicans' watch -- the credit crunch started in September, 2008, before Obama was even elected -- after they had controlled the White House for 8 years and Congress for 14 of the last 16 years. It's a little disingenuous to make the claim that the problem is Obama since he's been in office only about a year.

Specifically about the horse industry, ie, TB racing, the constant complaint I've heard from the people on the MB is that costs are too high and purses too low to make a profit racing most horses -- and consequently, much profit breeding. That's not a very good business model, and that's the real issue.

[Linda_d]

Obama reminds me a bit of my darlin' old mum - except she was Irish Catholic, not Kenyan Muslim.. when I was taking all those business development and project management trips for my IBM Business Partner company she once commented I was lucky that all those big airfares and hotel bills went on my expense account (!?!) She was serious. I pointed out to her that I owned the company and so I "reimbursed" my own expense account. She found that unfathomable. I think Obama has no clue about accountability for debt.

Obama isn't Muslim. He's Baptist or Methodist I think.

[dray33]

Love the short term memory. Does anyone remember the country that Obama inherited?

[Shammy Davis]

Although this thread began as equine related, it's apparent it has taken another direction. Why don't you take it to Politics Board. I don't get the Obama Equine connection even if it does include JP Morgan et al.

[TrueColours]

I remember when the Egyptian Arabian market went into the toilet.

Grossly over inflated prices, super hype as to the fabulous value and prestige these animals possessed, dreams of wealthy lifestyles hobbnobbing with the rich and famous as your "job" (because once you owned a rare and exotic Egyptian Arabian you'd make SO much money and have SO much fun, you'd never need to work a day in your life any more!), lavish parties to invite more suckers to buy into the dream ... on and on it went ...

Has the same illusion been created about the TB racing world? Have the buyers (and in some cases the hordes of small and large breeders as well) bought into the hype that once you buy this well bred mare with the good solid race performance background and breed her to this commercially attractive stallion that she nicks well with - the world is now your oyster? Buy this well bred yearling and enjoy fabulous success and wealth? Spend $2000 or $3000 a month in training fees - dont worry - you'll get that money all back again once your prodigy starts winning all those races???

Did people buy into this dream without the infrastructure in the races and the purses to support the dreams and livlihoods of so many right across the board, in every State and Province that has TB racing?

Was this more "Alice in Wonderland" than reality?

Will the TB industry ever recover and be like it was before or are we on a brand new path that must be charted again right from "Square One" ...

[Georgerz]

Madelyn wrote: "not Kenyan Muslim". By validating the birthers, you, Madelyn, join the fringes of the right wingers. You make yourself look uneducated, crazy, bigoted and racist. You have not spared opportunity to condemn Obama, not for what he is or is not, but because of his color. You are one of the minority of people that can't stand or understand that a black man has become the President of the United States. How sad, from a person that otherwise seems to be ok.

[tinners way]

I think it is highly unfair to call Madelyn a racist. How could you possibly come to that conclusion. Obama himself has not chosen a church to worship in, and has confused the 50 United States with the 57 Muslim States

Obama is a highly skilled politician who has done a spectacular job reading the teleprompter. Start blaming congress, and ignorance in America for buying into hope and change. The true colors are coming out with the health care plan, penalizing the banks, etc. Who do you think will be paying those "fees", and assessments on the "cadillac" health plans. The very people that have believed the government will take care of them.

Everyone is going to pay. It is either trickle down taxes or trickle down economics. In 3 years we will all have the choice to cast that ballot again, and can ask ourselves are we better off now or before.

Obama needs to learn some lessons. The word "I" is boring,

[reenci]

what dont you fools understand ? we the united states.....black ,white purple ,brown ...what have you...SPENT a total of 92 BILLION dollars more than we took in last month!! you cant spend your way out of debt......he is a one term president...BANK ON THAT. and as for race...dont give me that whiney bullshit...liberal elites are the biggest racists going. my grandsons half black.....so dont tell me this shit about racisim...black people as a whole would be alot better off without the economic handouts you libs dole out like a snack to a pet.....its disgusting.and demeaning...fact is people are finally starting to wake up to this....and i dont think madelyn is a racisit from her comments.....cant say black, muslim,...good grief you sound pathetic.

[reenci]

and i hear by apoligize for going off track of this thread.