South Africa’s backpedalling on debt guarantees provided to a state-owned bank threatens to shut the lender and other cash-strapped government entities out of the bond market.
The Land and Agricultural Development Bank of South Africa has been battling to repay its debt since a drought caused many of its customers to default on their loans. To get on a stable footing, the lender proposed that National Treasury partially guarantee new notes it will issue as part of a restructuring. The Land Bank said on January 14 the plan was rejected by the finance ministry and the guarantee withdrawn.
“There is now an elevated risk that this latest action may impact the ability of other state-owned entities to raise funding,” Olga Constantatos, the head of credit at Futuregrowth Asset Management Ltd., which owns Land Bank debt, said in a note titled ‘BOOM! Land Bank Drops a Bombshell.’
SA’s finances have been stretched by constant support to unprofitable state-owned companies, deep-seated corruption and a wage bill that has jumped 40% over the past 12 years. The Land Bank provides almost 30% of loans to the agricultural sector, and Finance Minister Tito Mboweni has said the lender is too important to fail.
“It may also have credit-ratings implications” for state-owned issuers, as ratings companies factor guarantees into their assessments, Constantatos said. “We’ve been negotiating on those terms for eight months.”
The Land Bank will issue regulatory filings when there is progress to report regarding talks with lenders, the Treasury said in an email. There have been no delays, it said.
“The whole nature of the liability solution has fundamentally changed, so we have to start all over again,” Constantatos, whose firm oversees the equivalent of almost $13 billion in assets, said. The assumption that there would be a partial guarantee of 60% was key to getting the restructuring done and hadn’t been an issue before, she said.
‘Up in the Air’
“There are too many things that are now up in the air for any lender to work on this new liability solution and deliver implementation by March,” said Jones Gondo, a credit analyst at Johannesburg-based Nedbank Group Ltd. “Chief among these things is why the National Treasury can’t commit to a guarantee as presented?”
The Auditor General issued a disclaimer in the lender’s latest annual results, citing a lack of evidence to reach a conclusive audit. Land Bank, after a R3 billion last year, has said it needs another R7 billion to ease a cash crunch. It’s also being sued by Standard Chartered Plc, with judgment reserved following a hearing in December.
The government now wants creditors “to accept involuntary participation in a five-year amortizing structure,” exposing them to all of the risk, said Gondo.
If the latest plan fails, bondholders may face a liquidation with poor recovery prospects, he said. “I don’t see why they would accept this proposal, if only to be extremely accommodating to the Land Bank and National Treasury as shareholder.”
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