10/02/2008 11:00PM

Credit crisis just a threat - for now

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LEXINGTON, Ky. - A credit crunch that is hitting consumers and businesses so far isn't having dramatic effects on breeders and stallion farms. But if the general economy continues to falter even under the Wall Street bailout plan passed Friday by the House of Representatives, both the farms that produce Thoroughbreds and the bidders who purchase them could feel the pinch, bankers and horsemen said this week.

Credit oils the seasonal Thoroughbred farming economy, which often has a significant lag time between the purchase of horses or stud fees and the payoff at auction or during foaling season, when stud fees become due.

"There are breeders who rely on credit, if not for acquisition of breeding stock, for farm purchases, capital improvements, and in dealing with the seasonality of their income," said Ted Berge, a senior banker at JPMorgan Chase who has handled commercial loans in the Thoroughbred industry for 20 years. "So it is important. And, oftentimes, it's important to people who have their business interests outside the horse industry. The availability of credit is one of the things that has allowed them to make investments in the horse business."

So far, credit is still available for Thoroughbred operations, Berge said.

But declines in the 2008 yearling sales, combined with the larger economic crisis, have raised the prospect of longer-term concerns. If horse prices keep dropping and breeders downsize, stud farms that paid premium prices for their stallions but feel pressed to drop their fees could be among those pinched hardest. Already, some stud farm owners report they are having trouble collecting stud fees, and many say they will not be aggressively pursuing new stallion prospects.

"The good thing is that we have an international business," said Doug Arnold, who stands 10 stallions at Buck Pond Farm. "If people have cash and don't know what to put it in, I'd just as soon put it in land, horse farms, or horses. Horses have become an international commodity.

"But getting your proverbial house in order is a good thing," he said. "Reducing your debt load is a good idea. And things could work out just fine."

That conservatism appears justified.

"There are tough times ahead of us," said Berge. "I was listening to predictions today that there could be something like 25 percent less available credit in the near term. There's currently about $48 trillion in commercial credit out there, so they're talking about a $12 trillion reduction. If that happens, it means the cost of the credit will increase. . . . It's bound to affect the horse business."

On the other hand, horse operations with current lines of credit already tend to pay higher rates and request lower loan amounts than other businesses, and already have strong depository relationships with their banks, Berge said. That could help buffer them from credit cuts.

"The banks we do business with aren't throwing up their hands," said Florida-based yearling-to-juvenile reseller Mike Mulligan, "but you have to have the finances to back it up."

That means either outside investors, enough wealth to tie up capital in your business without hardship, or maintaining that line of credit. Mulligan says he and his pinhooking colleagues haven't seen cuts in credit lines or other dire situations, a fact he attributes partly to the strong equine lending expertise among bankers in horse centers like Ocala, Fla., and central Kentucky.

Like many in the Thoroughbred business, he's more concerned about how next year's potential 2-year-old buyers are faring now.

"The credit crunch potentially has long-reaching effects on everyone," said Mulligan, who calls himself a cautious optimist in today's financial climate. "As people's ability to make money in the world decreases because of the credit situation, that damages our buyer base."

A poor juvenile sale season could be the bellwether for declining yearling sales, too, because pinhookers return to the yearling market to restock their inventory. That's a follow-on scenario that horsemen and their bankers hope to avoid in 2009 and beyond. For now, they're taking hope in a significant positive in the Thoroughbred market: that horses perceived to be of better quality are still attracting lively bidding and good prices, despite the larger economic questions.

"The last September sale was sobering, but a single year like that isn't disastrous," Berge said. "Two or three in a row, if a 15 percent decline becomes a 50 percent decline, in that case there will be dislocation. I don't see a lot of problems out there at the moment. But we're in semi-uncharted waters."