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SA backpedalling on debt guarantee risk state firms

Uncertainty persists at Land Bank. Photographer: Bloomberg/Bloomberg

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 The Land Bank said on January 14 the plan was rejected by the finance ministry and the guarantee withdrawn.

READ: South African policies go some way to tackling poverty and inequality

READ: Land Bank reworking debt plan after state guarantee declined

“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.”

© 2021 Bloomberg L.P.

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And slowly the noose tightens !!!

One thing is for sure – State Owned Entities, can no longer rely on a blank cheque from government. Which is a great new development. Now they actually have to keep the boat floating and work for their salaries. Also, any state owned entity that does not have a clean audit should not be allowed a bail out. As simple as that.

This is the way the cookie crumbles. Every SOE and 80% of municipalities are in the same situation. What is the value of that government bond now? The loan from the pension fund to Eskom, a large municipality, SAA or SABC is impossible to evaluate now. The government proposed haircuts as a solution. What will the extent of the haircut be?

To what extent can I trust that quarterly statement from my pension fund now? What is the value of my savings when the fund manager says “There are too many things that are now up in the air”.

The issue is not whether pension savings may be used to fill the holes at SOEs. The point is that those funds have been used already. They owe it to the pension funds and they are unable to repay it.

Another 100 year plus old institution destroyed in 25 years.
How odd the blame is all due to the last drought.Always a scapegoat.I would imagine the Land Bank has withstood numerous droughts in a dry country like SA. Not a mention of the real causes. Cadre deployment, inept management, poor policies, failed audits without corrective action and we can go on. Government admit you have failed again.

National Treasury has not commented on this article. So to draw any inference that SOE credit as a whole is at risk of a haircut is blowing things out of proportion. Land Bank has been sketchy for years – they were relying on a government guarantee to issue 3 month paper 5 years ago – not exactly a great credit play regardless of what a rating agency says. If anything Futuregrowth et al should really sharpen up their pricing skills – any company has that acute a liquidity problem makes it high yield and should be priced accordingly – and if a workout happens there is no worries because the risk/reward equation makes sense.

End of comments.

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