Land Bank clients ‘too high risk for commercial banks’

It has been a rough first few months of the year for the Land and Agricultural Development Bank of South Africa (Land Bank).

Land Bank clients ‘too high risk for commercial banks’
Ayanda Kanana, CEO of the Land Bank, said the bank’s liquidity problems, which led to it defaulting on a recent loan repayment, was partly due to some of the bank’s lenders withdrawing their facilities following two credit ratings downgrades by Moody’s Investor Service.
Photo: FW Archive
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It has been a rough first few months of the year for the Land and Agricultural Development Bank of South Africa (Land Bank).

The bank, a wholly government owned development finance institution, is experiencing a liquidity shortfall following two credit ratings downgrades by Moody’s Investor Service in January and March this year, leading to the bank defaulting on one of its loans.

Earlier this month Land Bank missed a loan payment, leaving government liable for about R5,7 billion of guaranteed debt.

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According to a Johannesburg Stock Exchange News Service (SENS) statement South Africa’s National Treasury had increased guarantees to the bank to R5,7 billion in February, which the bank was using to raise funding.

While the bank was one of the few state-owned entities making a profit, it was uncertain whether government would honour these guarantees amidst the economic crisis emerging out of the coronavirus disease (COVID-19) pandemic, the statement added.

However, according the John Purchase, CEO of Agbiz, if government was not able to assist Land Bank, there might be serious repercussions for farmers and for South Africa’s national food security.

While the Land Bank had a development mandate, Purchase said that more than 90% of its clients were commercial farmers and agricultural businesses. The bank, in effect, played a critically important supportive role in the South African food supply chain, he said.

“With the poor economic situation and COVID-19 crisis, many people and organisations are vying for government support. In line with other state-owned enterprises, such as Eskom and SAA, the Land Bank is seeking government support, partially precipitated by its recent downgrades. Government will hopefully assist the Land Bank, because it is an essential service in terms of the country’s food security, and not just a mere ‘nice to have’,” said John Purchase, CEO of Agbiz.

“Some of the businesses on the Land Bank’s books are perceived as too high risk by commercial banks, so another commercial bank will not necessarily step in and fill the void if the Land Bank should close down. Certain commercial banks have also scaled down on their appetite for agriculture, because of the higher risks associated with production and poorer returns lately, especially in light of climate change and ongoing droughts,” Purchase added.

Commenting on the bank’s liquidity problems, Ayanda Kanana, who was appointed new CEO of the Land Bank in March, the downgrade resulted in some of the banks lenders withdrawing their facilities, while other investors reduced the roll-over of maturing facilities.

The latter measure was the result of these investors being restricted by their investment policies with regard to the level of investments that can be made due to the Land Bank’s new credit rating, he said.

Most of the Land Bank’s funders and investors also reviewed their risk appetite, all at a time when the bank had to contend with its peak period for loan drawdowns from customers.

Kanana said in the SENS statement that the bank was negotiating a “waiver and extension of the repayment date” with the lender, and also engaging with other funders to defer financial obligations and “institute appropriate arrangement and concomitant remedial actions until the long-term funding lines have been secured”.

In addition, the bank was undertaking a balance sheet optimisation exercise that would take into account the tenure of the debt and the essential development mandate that needed to be attended to.

The bank had not yet reported results for the financial year to end-March 2020.