South Africa mulls Land Bank bailout as another state firm flops

Struggling SOE follows in the footsteps of Eskom, SAA and others.
Finance Minister Tito Mboweni. Image: Bloomberg

South Africa is considering bailing out yet another state-owned company, at a time when it needs all the money it can get to revive an economy felled by the coronavirus pandemic.

The National Treasury said Tuesday it’s mulling more aid for the nation’s largest agricultural lender, the Land and Agricultural Development Bank, in the form of a recapitalisation and more guarantees on its debt. Last week, the state-owned national airline failed to convince the government it needs extra financial aid, although talks on alternatives for South African Airways continue.

The Land Bank is seeking waivers from its creditors after missing a loan repayment, triggering a default event that could leave the government liable for R5.7 billion — a guarantee the state provided in February. It comes as President Cyril Ramaphosa’s administration prepares a series of measures to support citizens and companies in distress because of a nationwide lockdown to curb the spread of Covid-19.

“The demands on National Treasury are enormous and unrelenting,” said Jones Gondo, a credit analyst at Nedbank Group. “The contingent risks are beginning to crystallise because these entities are unable to withstand this economic shock we are in. The choices have become binary: either bailout or closures.”

While Finance Minister Tito Mboweni has pledged to curtail financial support for cash-strapped state-owned companies, the Land Bank’s latest woes are a reminder of how difficult that task is. Mboweni has long cited his desire to shut companies draining the nation’s coffers, but has run into resistance from factions within the ruling party and its alliance partners in the South African Communist Party and labor unions.

Mismanagement, corruption

Years of mismanagement and corruption have crippled state companies including power utility Eskom, arms manufacturer Denel and the national broadcaster. The government has guaranteed about R480 billion of debt issued by state-owned entities and is on the hook for R980 billion of contingent liabilities, according to the Treasury. Those liabilities are equivalent to about 60% of its total revenue.

Assistance to the Land Bank would need to be “accompanied by balance sheet optimisation,” while it would also have to “correct the structural liquidity risk embedded” in its balance sheet, the Treasury said in an emailed response to questions.

The Land Bank’s failure could cause borrowing costs for farmers to surge and, if not dealt with fast enough, threaten food security, said Omri van Zyl, the executive director for AgriSA, the nation’s largest farmers group. The Land Bank funds more than 30% of the industry.

“Farmers can’t absorb additional costs of raising capital,” Van Zyl said.

Read: Land Bank: Possible default on R50 billion notes

The Land Bank in 2017 signed a $300 million 10-year facility that was arranged by Standard Chartered. The debt was backed by a guarantee from the Multilateral Investment Guarantee Agency, the political risk insurance and credit enhancement arm of the World Bank, the Land Bank said at the time. It has R13.8 billion of bonds, according to data compiled by Bloomberg.

“Each case is unique, but what is common is that SOEs have been in financial trouble for far too long — given the government’s slow pace of meaningful reform implementation,” Nedbank’s Gondo said.

© 2020 Bloomberg

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Characteristically during the Great Depression banks and agriculture also failed. Albeit for different reasons.

Incorrect headline. Should be-

Corrupt ANC “mulls” rewarding mismanagement and corruption by looting more taxpayers money.

I don’t think Jones Gondo understand the market of the Land Bank (said with respect). The Land Bank is exposed to agriculture and agriculture only. The mandate of the Land Bank is that of development of small scale farmers, provide access to funding and resources for these farmers as well as supporting the larger agricultural players. The Land Bank also supports transformation of existing large agricultural businesses. Commercial banks have a diversified exposure, from investments, corporate finance (mostly to JSE listed entities), residential and commercial property finance etc, etc. These are mostly secured lending.

Typically, farmers receive income once or twice a year, who will fund their operational and fixed costs? I wonder how the average person on the street will be able to survive with their normal commitments, and only get paid twice a year…
There is very limited appetite in the commercial market to finance agricultural property over tenors of 15- to 20- to 25 years, which is one of the things the Land Bank does to support agriculture.

How can any bank support and enable development, transformation, ensuring food security without access to lower cost of funding. The Land Bank does not receive “cheap funding” from any institution. Jones Gondo must also remember that commercial banks have a pool of investments and deposits from their large customer base, providing good and cheaper access to capital.

Personally, I do not believe that any institution is too big to fail. Commercial banks can also experience rapid increases in their lending book, potential run on deposits and investments, especially with the downgrade of the SA economy.

Maybe get the full picture, see it from both sides and remember that your business can also run into trouble, before playing the “another failing SOE” card.

Fair comment, and all true.

However, when one considers that everything run by the ANC results in looting and failure, the simplest explanation is that the ANC screwed up yet again.

And the scary thing is, they are now going to save us by doing the structural reforms they have known about for the last 25 years, but have not done.

Seriously?

GPG – A very well put together comment and one that I can only agree with. I think my only concerns are:_
Firstly, that if any SOE should be receiving cheaper funding it should be the Landbank especially given that this is institution plays a crucial role in our own food security and also in our export income too.
Secondly, given the sensitivities of the market that the Landbank are in it is even more crucial that the people that work in this institution should be specialists in the agricultural sector or at the very least should have a special interest and understanding in agriculture.
Thirdly,the Landbank like many other SOE’s has document cases of maladministration and illegal lending transactions which again given the sensitivities of the agricultural sector should not be allowed to happen and this is where my criticism comes from.
The problem about corruption apart from all the more common points of discussion is that eventually you reach a point where there is no more money left and then that entity will fail pushing all the employees in that structure out of work.Case in point is SAA.
Again as I mentioned before your comment is 100% correct, thank you for a very insightful perspective.

Would we still be able to get financing to prep for the next planting season ?

One thing I know is that it might be a hurdle to get finance from a commercial bank.

End of comments.

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