In the time between when Zayat Stables defaulted on a $23-million loan from MGG Investment Group last September and when the lender filed a lawsuit against the operation last month, owner Ahmed Zayat laid out a roadmap to settle the debt by liquidating his equine holdings.

The dispersal plan, delivered to MGG in mid-December and made public in court documents, had Zayat representatives place a valuation on each racehorse, broodmare, youngster, and stallion interest under the owner's banner, based on their projected prices in a favorable but realistic marketplace. When the first horses were offered at auction as part of the liquidation, the difference in opinion between Zayat's assessment and the actual market value was quite stark.

Six horses valued at a combined $1.9 million were sent through the ring at the Fasig-Tipton Kentucky Winter Mixed Sale earlier this month, and they brought $366,000 – about 19 percent of the estimated total. One horse accounted for $310,000 of that amount. Another mare valued in the document at $450,000 finished under her reserve with a final bid of $95,000, and her yearling filly was a no-bid off a $350,000 valuation.

It was a big swing-and-a-miss from the projected figure, which brings into question how and why the horses were valued at the prices they received. There are no simple answers, but attorney Frank Becker said one of the biggest reasons is the easiest to explain.

“Value, when it comes to horses, is just a pretty darn difficult thing to pin down,” he said. “I have represented lenders for 30-some years, and as a lawyer, you warn lenders that this is the case – that values are often difficult to determine and they can change very dramatically. There's a lot of art rather than science to it.”

Becker, who authored the book Equine Law and teaches classes on the subject at the University of Kentucky, said valuations are often a major discussion point when he represents a lender, or when a dispute over a horse – or money tied to it – goes to court.

When a lender is considering equine assets as collateral, Becker said the standard of due diligence is to hire a third-party bloodstock agent unaffiliated with the borrower to provide an assessment of each horse's value.

The evaluation provided by Zayat Stables in December was the second time the operation had taken stock of its holdings for MGG last year. In mid-2019, Zayat Stables hired an unnamed third-party bloodstock agent to price the inventory, followed by the assessment openly provided by Zayat's representatives in December. In the sense that the borrower hired the assessor in both situations as opposed to the lender, even if the agent was truly neutral in his or her judgment, both valuations were against the norm to some degree.

Becker said there are two primary methods to assigning a valuation to an equine asset, each with their own pros and cons, and a lot of guesswork.

The first, and most common, is to take a “real estate appraiser” mindset and find horses with comparable aspects to others that have sold recently. This method allows an assessor to use the real-time marketplace to figure out how the prospect in question fits into it.

What factors are used in comparable valuations can vary depending on the age and use of the Thoroughbred, but pedigree and conformation are the building blocks. When assessing a broodmare, the produce record and commerciality of the stallions she's bred to can also narrow down the search for the prices of similar horses.

Finding comparable figures can be relatively simple for a horse from a family that's well-known in the commercial marketplace. A page with lots of black type and deep produce records is likely to have a few horses with similar resumes that can be used as mileposts. However, a horse with a lighter pedigree might not have as many examples to point toward within its family, which can make a price harder to nail down with great accuracy.

The other method is based on income projection, essentially determining a horse's value on what it could do in the future as much as what it's doing in the present.

“It's tougher on racehorses, and you get into cases where judges try to decide whether you can do any kind of that projection in regard to racehorses,” Becker said. “Most judges say no, but with regard to breeding stock, there's a basis there for doing valuation based on income projections. You may have a track record – this mare's foals have brought $50,000 each of the last three years to the same stallion or comparable stallions – so you can project it out: the mare's probably going to live 22 years or something and you can map out what the income might be for that mare.”

Further complicating matters is the way a horse's value can fluctuate, both in a quick flash and by slow erosion. The dam or sibling of a major stakes winner can multiply its value and render a previous valuation obsolete, while a page that goes cold can cause some dissonance in assessed value versus actual market value.

“They're a little bit like fruit – they can change pretty quick,” said bloodstock agent Charlie Boden. “Appraisals are so subjective, and for us, there are few comparables to use for what the horse is really worth. Really, when it comes down to it, what a horse is worth is what two guys are willing to fight to the finish to determine that value.”

Becker said there is typically not much room for negotiation between a lender and a borrower when it comes to a horse's valuation, but it's well within the borrower's right to point out a recent update to the page if it can affect the bottom line of an agreement.

So, what's the benefit of aiming high on valuations for a loan, even when the open market might provide a wildly different result? Before the loan is issued, a higher worth can mean a bigger line of credit. If a lender does not request its own appraisal, this can leave the borrower with a bit more freedom to name its own price.

“If an unwary lender gets an appraisal on a horse and they're loaning you money based on equine assets, there's the benefit if they're using the asset as collateral,” Boden said.

What makes the situation with Zayat Stables different is that its December assessment came not as a precursor to acquiring the loan, but as a plan to make the money back after the loan had long since been approved – and defaulted upon.

It was unsuccessful, but the attempt to show the value of the stable could have been used as a way to stave off litigation from MGG, and optimistic valuations can make that an easier pill to swallow.

“If there's a cushion of value there, even though the income's not coming in to pay things currently, that would certainly argue in favor of buying time, especially if what they're trying to do is get a receiver,” Becker said. “That's done all the time in bankruptcy court, where often the debtor shows the judge that there's plenty of value there, even though there's not current income coming in to pay a loan. Part of the purpose of bankruptcy court is to take that into account and hold that lender at bay because there is that cushion of value. That's one thing bankruptcy court provides that can be done, but that's not happening here, because we're in a receivership, not a bankruptcy.”

New to the Paulick Report? Click here to sign up for our daily email newsletter to keep up on this and other stories happening in the Thoroughbred industry.

Copyright © 2020 Paulick Report.