Freedom from Euros
The freedom for farmers to take their Single Farm Payment (SFP) in Euros rather than Sterling has unlocked the potential for businesses to explore the new benefits of Euro-based loans. However any financial benefits should be invested wisely in order to make the saving worthwhile. The UK200Group’s Prime Partner Clydesdale Bank and the Group’s Agricultural Committee Chairman, look at the situation.
Henry Graham, Head of Rural Business at Clydesdale Bank comments: "The difference between Eurozone and UK interest rates has existed for several years, of course, usually offering those who borrow in Euros a significant saving in interest payments. In the past, the risk that money lost during currency exchange might outweigh any reduction in interest payments, made this a difficult area for Sterling-based borrowers. This is no longer the case.
"The new provision of a secure and continuing Euro income stream through SFP has definitely moved the goalposts. In addition, for once, it’s a move which favours UK producers. As a result, we’ve been working with a number of customers over the past two years on Euro-based loan options, the rewards from which look very promising indeed."
For example on a loan of £250,000 over 10 years the potential saving in interest payments, between using Eurozone interest rates as opposed to UK rates, range from £25,000 to £40,000. That’s depending whether the borrower uses variable or fixed rates. On the variable rate scenario, the savings will decrease or increase from these levels depending on the differential between Sterling and Euro variable interest rates.
To take advantage of such loans the producer must elect to take SFP in Euros, creating the all-important same currency income stream to enable Eurozone interest rates to be assessed, free from any currency exchange exposure.
"In working with customers on Euro loan developments we always urge them to be aware of a number of key points," said Craig Wilson, Senior Partner, Clydesdale Bank Treasury Solutions.
"Before taking a Euro loan, for example, satisfy yourself that you’ll have a Euro income throughout the term of the loan.
"Any Euro debt should be maintained at a level where the Euro income easily covers the annual payments, taking account of planned reductions to SFP in future years.
"You should also consider applying some form of interest rate protection. This will account for a future situation where interest rates in Europe may increase above and beyond current expectations. Bear in mind that, although current market expectations indicate it’s unlikely that Euro interest rates will rise above those in the UK, there is always the potential for that to happen.
"Finally, customers should note that there is no payment date flexibility attached to a Euro loan which is arranged on the basis of an annual repayment. Once the loan is established the loan repayments need to be made on a set date, regardless of when the Euro income is received. To accommodate this fact, given that first-year SFP is currently being paid at different times throughout the UK, we have set a deliberately long timescale for new Euro loan customers. Setting up and running such arrangements in line with future SFP delivery should be much easier."
Richard Barnett, chairman of UK200Group’s Agricultural Committee comments: "There’s no doubt that borrowing in Euros can have substantial benefits for the farmer involved. However as with any loan it’s important to remember that you still owe a substantial amount of money, therefore I would advise clients to always consider paying off some of the capital on the loan with the money saved in interest. This will avoid any exposure to exchange rate fluctuations and reduce the overall debt.
"There is of course the option to use the SFP for other investments and as a result we are seeing some farmers, who wish to keep the single farm payment out of the farm bank account, looking at residential property purchases funded by a euro loan on a comparatively low interest rate repaid by SFP.
"If SFP is retained in the farm business my strong advice would be to try and use the single farm payment to invest into the business to make it stronger (eg additional land), or reduce borrowing levels.
"There are conditions in place for borrowing in Euros so farmers should consult their accountant to check if they are eligible. Accountants are able to identify those farmers with single farm payments at a sufficiently high level who have the appropriate level of borrowing to warrant a Euro loan."
For more information contact the UK200Group on 01252 401050 or visit www.uk200group.co.uk
