ZAYAT AND THE ‘TALE OF TWO BANKS’
By Ray Paulick
The Chapter 11 bankruptcy filed yesterday by Zayat Stables stems from a "tale of two banks," owner Ahmed Zayat contends, both of them named Fifth Third. The first, a "good bank," was the one based in Lexington, Ky., that sought business in the Thoroughbred industry and worked with its clients. The second, the recipient of $3.2 billion in federal funds from the TARP bailout, was the "bad bank," one based in Cincinnati, Ohio, and getting out of the equine lending business.
The Chapter 11 bankruptcy filed yesterday by Zayat Stables stems from a "tale of two banks," owner Ahmed Zayat contends, both of them named Fifth Third. The first, a "good bank," was the one based in Lexington, Ky., that sought business in the Thoroughbred industry and worked with its clients. The second, the recipient of $3.2 billion in federal funds from the TARP bailout, was the "bad bank," one based in Cincinnati, Ohio, and getting out of the equine lending business.
Fifth Third filed suit against Zayat in December, alleging the New Jersey-based businessman owed $34 million in unpaid loans. Zayat contends the suit is part of a "scorched earth litigation practice" by a bank "reneging on its promises." He countersued.
Zayat formed his stable in August 2005 and had as many as 203 horses at one time. He has been among the leading owners in the United States since the stable’s formation. His equine investments totaled more than $40 million, Zayat said, and the company’s strategy was geared toward developing top-class racing stock that would provide short-term returns in purses and long-term dividends in breeding residuals. Longer range plans for the Delaware-based LLC "envisioned acquisition of companies involved in equine health research and product development as well as the possibility of racetrack ownership."
Zayat’s filing with U.S. Bankruptcy Court in New Jersey "seeks protection so it can continue to operate its business and build on its success, for the benefit of all of its creditors in the face of predatory lending practices" by Fifth Third.
Zayat contends he and Fifth Third were in discussions to renegotiate the outstanding loans last summer and fall, and Zayat contends the bank agreed to terms. The agreement, he said, prompted him to withdraw 10 yearlings he intended to sell at the 2009 Keeneland September yearling sale, along with 57 horses entered during the Keeneland November breeding stock sale. Instead of being a seller at Keeneland, Zayat bought 24 yearlings at the September sale, with the sale company extending him credit of $3,131,500, he said.
The 20 largest unsecured creditors listed in his bankruptcy petition include several trainers ($148,790 owed), veterinary clinics and pharmacies ($143,258), stallion farms ($318,000), vanning and air transport companies ($85,596), consignors ($54,682) and boarding farms ($65,907).
Zayat Stables is seeking protection from the Bankruptcy Court to continue to operate while reorganizing its business. "The Debtor does not intend to languish in Chapter 11," Zayat wrote. "Rather, the Debtor intends to quickly file a plan of reorganization that will allow for the restructuring of all of its debts as recognized by this Court and preserve a going concern value for the benefit of the Debtor’s stakeholders."
Click here to read Zayat Stables’ voluntary bankruptcy petition and list of unsecured creditors.
Copyright © 2010, The Paulick Report
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Tags: ahmed zayat, bankruptcy, fifth third, fifth third bank, horse racing and breeding, Paulick Report, Ray Paulick, Thoroughbred industry, zayat stables
February 4th, 2010 at 7:26 am
Just another bankruptcy. We have seen a lot of high profile bankruptcies (NYRA, Magna, NYCOTB, etc) and we will see many more before this financial crisis is over and thoroughbred racing is on a firm footing again. Times are tough for most everyone.
February 4th, 2010 at 7:51 am
Very revealing. The most interesting point to note is that following a meeting with Fifth Third in September 2009, Zayat then approached Keeneland in order to “borrow” $3.1m to buy yearlings at the September Sales. Are Keeneland now acting as bankers??? According to these papers they are still owed $2.3m (Zayat’s brother apparently paid of $750k on 2 Feb).
February 4th, 2010 at 8:09 am
Horsey fever- Catch it! Amazing how even successful, self made people can quickly overextend themselves in this industry.
February 4th, 2010 at 8:15 am
Their business model was the exact same as everybody else in the business - “let’s make money on the track and then make money in the breeding sales.” This was the line pitched by sleazy consignors, trainers and bloodstock agents to any well-intentioned and dee-pocketed owner.
Hardly anyone makes money on the track and people made money in the breeding shed as long as prices went up.
The reason this won’t work is none of the trainers, vets or van companies will continue to do business without being paid up front and it appears Zayat does not have it.
February 4th, 2010 at 8:33 am
Fifth Third has a growing reputation in the Buckeye State of strong-arm practices more worthy of street thugs hired by loan sharks to shake down “clients.” This situation again demonstrates the grand failure of the TARP handouts to ruthless joints that take grand delight in playing the grim reaper with people’s personal and professional lives.
February 4th, 2010 at 9:19 am
There is little doubt that the irritatingly named 5/3 Bank is in trouble, hence the overly aggressive attempts to call in debts. However, that is completely separate from the embarrassing manner in which Zayat has conducted his business. His ‘bad pay’ reputation has proceeded him for quite some time on the backstretch, and there are both vets and top trainers who refuse to work for him as a result.
Therefore, the notion that this problem was due primarily to questionable bank practices cannot be taken seriously.
February 4th, 2010 at 9:20 am
Yes, Keeneland and Fasig Tipton act as a bank, but only to those that know how to play the game or are connected. Go to the Paulick Report Archives and read the article on Jim Cullen and you will see read FT allowed him to bid up a yearling to one hundred grand. Cullen never paid FT, nor did FT ever file suit to get the money back. What’s one hundred grand between friends in this economy?
February 4th, 2010 at 9:24 am
Note that he owes just about as much to veterinary clinic and pharmacies as he does to his trainers. Just goes to show how vets really make the racing world go ’round.
February 4th, 2010 at 9:24 am
Is this the same Zayat that Bloodhorse magazine wrote about? Their article clearly said that Zayat had produced a statement saying everyone was being paid in a timely manner. Now, in the Paulick Report, I find out what’s really happening.
February 4th, 2010 at 9:32 am
I have a tale of three banks that were bankrupt.
February 4th, 2010 at 9:33 am
What kind of bank loans money in the quantities described here based on a collateral whose value is as ephemeral as horses? This type of bank insanity was part and parcel of the bloodstock boom in the 1980’s, lest anyone ever remember or learn from past mistakes. Banks that wouldn’t think of having an “Equine Department” suddenly were awash with bright young men and women eager to loan money on anything with 4 legs. No surprises when the bottom drops out and the market implodes. The “equine department” is disbanded and the loans transferred to the 3 piece suit equivalent of “Tony the Enforcer” “Customers” get cement shoes. Lives are ruined, fortunes dashed and marriages destroyed.
Horse breeding and horse racing are the purest forms of capitalism on the planet. There are no breaks, very few incentives and it’s all about risk. There are few rules and almost no outside regulation. That’s why I laugh when people talk about all the “handouts” we are getting in the horse industry. Think there’s a bailout for Mr. Zyat?
February 4th, 2010 at 9:43 am
I find this whole situation with Zayat ironic. Owners of businesses providing horse related services to Zayat didn’t find out until after the services were provided that Zayat pays only what he deems the services are worth, not what is billed. It was likely to take six to nine months for any type of partial payment and the statement from Zayat/his “Racing Manager” was that if you didn’t like it then “sue us”. What goes around comes around.
Comment #4 There are good, decent people in this business. You need to read Zayat’s grandiose article regarding how he selects horses at the sales.
Comment #5 Any bank would get concerned about a $34 million overdue loan (Interesting to know Keeneland is now loaning money). Wonder if Zayat told the Fifth Third to “sue me”? Good luck to the Fifth Third!
February 4th, 2010 at 10:01 am
Who is to blame? The banks for lending the money? Or the people who borrow and then can’t pay it back when asked to do so? There are always conditions attached when you play with somebody else’s money. Why didn’t Zayat just have some fun with his own $40m that he’s apparently put into his “business”? If ever there was a case of somebody overstretching themselves on the bloodstock rollercoaster then Mr Zayat is a prime example. Horsey Fever has a tendency to make peoples egos bigger than their pockets. It probably looked like such a good idea in 2006/2007………
February 4th, 2010 at 10:55 am
I am not taking up for the guy but from reading it seems he has enough assets to cover liabilites. I dont blame him for filing for protection if he lets the bank sell the assets they are not industry savy enough to get the most out of them. Alot of his holdings are long term and not worth nearly as much as they will be down the road. IMO I dont think he is trying to rip the creditors off I think they will all get paid.
February 4th, 2010 at 11:21 am
I guess that explains why Zensational went to stud after his 3YO season.
February 4th, 2010 at 11:27 am
Let’s see, I have a relatively clean balance sheet compared to Zayat. I will see if Keeneland will extend $2 million credit to me and I will buy just one yearling for that price so that my operating costs are kept low. I will pay Keeneland back from the proceeds of my future foreclosure..
And I will give Thoroughbred Times an exclusive interview on how I pick the best yearling in the sale.
By the way, the trainers and boarding farm and vets and transport company will have to carry me for a while until the yearling generates revenue. But it’s only one horse, no big hit for any one servcice provider. They can leave messages on my phone.
Back to reality, Zayat should have gone ahead and sold those horses anyway. I wonder if they would have covered their proportional share of the owed debt. That’s the question maybe neither side wanted answered.
And I do blame the bank somewhat for not approving an orderly partial liquidation. This sudden panic by Fifth Third is a violation of the spirit of TARP, which was supposed to include some forebearance and terms adjustments by the evil lenders. It is conceivable that with some luck Zayat could ride out the storm and get to the other side in reasonable shape.
Greenspan and Bernanke created the bubble that Zayat and Fifth Third got caught in, and both Federal Reserve Charimen have told Congress they cannot define money. Both Zayat and Fifth Third do know money and were trying to convert fiat money into tangible horseflesh. Had they bought real estate instead they would have still gotten into trouble.
February 4th, 2010 at 11:36 am
Hasn’t anyone made the connection that Fifth Third is also strong-arming Cash Asmussen over loans on yearling purchases? Seems that the Bank is at fault when they make loans, change the terms, and roll all into one big debt. The Bank seems to have erred in extending credit on equine assets. As we all know, the financial industry went south & bloodstock prices went with it.
It would be interesting to know just exactly how much Fifth Third has in outstanding equine industry-related loans.
And quite frankly, banks are only superceded by lawyers and used car salesmen in unsavory behaviour.
February 4th, 2010 at 11:43 am
Fifth Third Bank has been around for 150 years…..i am surprised that they let him get into them for that amount
February 4th, 2010 at 11:46 am
According to the documents, the most recent valuation of Zayat’s bloodstock was $37m. Not much of a comfort level left for Fifth Third when they are owed $34m. Is anyone surprised that they are in a bit of a panic???
Also could somebody answer how Zayat was able to purchase an additional $3m worth of yearlings at Keeneland when on Sept 15 2009 Zayat was still in crisis talks with Fifth Third? Did Keeneland choose to turn a blind eye to his predicament or did they fail in their credit checks?
Did he honestly think that buying an additional 24 yearlings for $3m (when he was already in a hole for $34m and had no working capital) was going to solve his financial problems??? Now that would make for interesting reading in the Blood Horse……..
February 4th, 2010 at 11:48 am
THAT 34 MILLION TO THEM IS LIKE 34 CENTS TO ME….
February 4th, 2010 at 12:07 pm
It certainly doesn’t take much to grasp the serious risks posed by big ticket buying in this sport especially with borrowed money.
IEAH as funded group, by comparison, can buy a 7-figure horse and have a dud on their hands. Sure the investors of the group will be miffed with a sour purchase but there is no interest rate to contend with, no principal to be paid off.
Comparatively Zayat overpaid in 2005 for Maimonides ($4.6 million) at the Keeneland September yearling sale. One splashy maiden win at Saratoga, a 3rd in a Grade 1, and that was it. Standing for $3,500. Many owners would be elated with that success - a New York Times article on the horse, a jaw dropping effort at Saratoga, and on the board in a graded race. Still when you pay that much with borrowed funds the formula for return will never ever work.
How many horses earn over $5M in their lifetime in purse money? The list is short and yes the “real money” is in the breeding but only if there is success on the track. When Zayat made that ‘05 purchase the stud fees were already softening. So too then would be any expectation it was a logical business model able to support $30M+ in loans.
Frankly if someone borrowed the money to buy Rachel Alexandra instead of JJ & Partner doing so I wouldn’t foresee economically that $9M purchase, after paying off the interest and principal after operating costs etc, ever yielding anything better then a single digit return over the lifetime. And that’s with one of the potentially greatest fillies of all of time.
February 4th, 2010 at 12:50 pm
Paula, don’t forget about those auto garages.
February 4th, 2010 at 1:52 pm
“The 20 largest unsecured creditors listed in his bankruptcy petition include several trainers ($148,790 owed), veterinary clinics and pharmacies ($143,258),”
“pharmacies” ?
It is dangerous when owners borrow money to buy race horses. Those horses find themselves under pressure to win as early as possible and at all costs (insured?) to help repay loans on already highly risky assets. The industry started to nose dive when it became all about money.
February 4th, 2010 at 2:35 pm
Haven’t we just been talking about the questionable tactics of Michael Gill? Why on earth do all his horses need that much in drugs? What happens to his horses after he is done with them. I can bet many in up in the barns of the Gills of this world.
February 4th, 2010 at 5:25 pm
Re: Pharmacy
If you actually look at the pdf the only entry that lists pharmacy is credit Boothwyn Pharmacy (PA) and they’re owed $14,375. No idea what that entails for actual purchases, but it isn’t some six figure expenditure as suggested above.
I do agree that with the swelling loans and interest the pressure comes on the horses to perform more frequently or drop down in class or simply go to the breeding shed earlier then someone without a cash flow problem.
February 5th, 2010 at 1:15 am
Glimmerglass, just checked Boothwyn Pharmacy and Bingo! It is a compounding pharmacy. Why would an owner spend $14,375 buying compounded drugs?
February 5th, 2010 at 1:19 am
a fool and the banks money are soon parted…
nuff said
February 5th, 2010 at 6:04 am
Who the hell borrows $35mil to get into the horse biz in the first place but an ego maniac?
February 5th, 2010 at 9:02 pm
JOE….TO ANSWER YOU QUESTION…WHEN A MFG DOESNT MAKE THE PRODUCT ANYMORE & U KNOW THE INGREDIENTS..A PHARMACY THAT ONLY “COMPOUNDS” WILL MAKE YOUR ORDER FOR YOU..