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."
'Pretty serious stuff'
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."
2008 vs. 2010
Two years ago, before the world banking crisis, horse industry experts estimate, there was about $1 billion in loans related to Thoroughbred horses. Now, that number is more like $500 million to $600 million.
In many ways, the situation in the Thoroughbred industry is the same as other lending markets, which have been pummeled by the collapse of the sub-prime mortgage industry.
"It's not like we're seeing aggressive types of new and imaginative lending policies for any industry," said Nick Nicholson, president of Keeneland, the world's largest Thoroughbred auction house.
"I do not think, historically, (the horse industry) is more risky than other types of loans," he said.
Nevertheless, some lenders have decided "the safe bet is to be safe and walk away," he said.
The situation has been exacerbated by the loss of one of the major players in the Kentucky horse market.
At the end of 2008, using federal bank bailout money, PNC Bank announced its intent to purchase National City Bank, one of the mainstays of the equine credit market.
PNC spokesman Fred Solomon confirmed that the bank is getting out of equine lending.
"After a review of the business, the business case for equine lending was not consistent with PNC's credit and risk policies," Solomon said.
That has been a big blow to those trying to find loans to buy horses, said David Switzer, executive director of the Kentucky Thoroughbred Association. "National City was a big lender to the equine industry, probably the leading lender in equine dollars," he said.
He estimates the bank had about $300 million in equine loans that have been phased out over the past year.
Chase Bank, another big equine lender, has filled some of that void.
"We have increased our overall investment in the horse business," said Ted Berge, a senior banker at Chase. He said Chase sees an opportunity to do more in the near future, and the bank will "continue to look at horses as acceptable collateral for an otherwise reasonable credit request."
But Berge said that the decline in the amount of lending is not due only to banks tightening up the purse strings.
"At some point, that's both a supply and a demand pressure," Berge said. "I don't know if we see the scale of credit requests as in the past."
PNC has sued three big names: racehorse owner/trainer Cash Asmussen, owner Bobby Hurley, and the Allen Paulson Living Trust, the remnant of one of the most successful racing and breeding operations ever.
Fifth Third Bank, another major player in the market, has the bulk of the suits, in dollars: more than $34 million in alleged defaults by top racehorse owner Ahmed Zayat and more than $18 million by Stonewall Stallions and Audrey and Marc Haisfield.
Zayat alleged in his case that Fifth Third also wants to get out of the business and decided to engineer his default to get the loan off its books.
Fifth Third denied that.
"Fifth Third is dedicated to equine lending and will continue to be for the foreseeable future," said Whitney Ellis, a spokesman for Fifth Third Bank. "While our credit standards have tightened, equine businesses with good credit will continue to get loans."
More lawsuits likely
In many ways, the suits filed so far involve cases that are anomalies, problems that might not have ended up in court in good times and are not necessarily part of the overall pattern of trouble.
What they do show, the experts say, is a fragility in the industry.
"The increase in litigation reflects two things: some uncertainty in the marketplace and some more aggressive mentality by lenders to correct what they perceive as problems, to try to clean them up and move forward," said Fasig-Tipton's Browning.
That trend is likely to continue.
Beck, the attorney, said, "I think it would be fair to say in the last two years the number of situations where banks have sued their borrowers who are borrowing based on equine collateral has increased significantly."
Which means more lawsuits could be on the horizon. Beck said, "It wouldn't surprise me at all."