The crisis is evolving, but resolution is slow.
This article was originally published on 23 April 2020 but has been updated since.
We believe that Land Bank is a vital and necessary role player in South Africa’s agricultural sector and that the government, likewise, considers it a strategic contributor to agricultural development.
At the onset of the Land Bank crisis, roughly 27% of agricultural debt in South Africa was supported by Land Bank making them a significant role-player in our agricultural sector. The risks of Land Bank not functioning effectively are dire and include a possible increase in food inflation, as the country becomes increasingly reliant on imported foods. In the current COVID-19 crisis and with global supply chains being disrupted, supply side risks are real. In the absence of adequate funding from the Land Bank and certainty about the timely resolution of the current situation, emerging farmers don’t have access to the capital needed to transition into established commercial farmers. The Land Bank therefore plays a critical role in growing and broadening the South African commercial farming base and therefore securing the current and long-term food security of the country.
Land Bank has a long history of operations and, post its restructure in 2006 to 2007, has shown itself to be largely self-sustaining, profitable, and with a suitable credit focus.
Latest events and views
As at the date of writing this update, we have seen some encouraging progress in resuming interest payments to funders as well as recent executive appointments. However, there seems to be some rethinking of the future role of the Land Bank in SA’s agri sector – most likely that it becomes a smaller, more developmentally focused business.
The SENS issued on 25 August 2020 notified the market that “on 18 August 2020, Standard Chartered Bank served an application out of court on the Land Bank to recover certain debt from the Land Bank ….” and that “Land Bank is working with its advisers and will be opposing the application.”
We have been advised that the court process for this matter has a number of deadlines which need to be met. One of these deadlines was for answering and responding affidavits to be filed which, we are advised, has been met. The next deadline is for “heads of argument” to be filed by 23 October. Land Bank’s legal advisors are of the view that the date for this matter to be heard is dependent on a court date being available before the December court recess. If the matter is not heard in early December, it will be heard in early 2021. We continue to monitor the situation and will advise as and when circumstances change.
Land Bank communicated in mid-September that there is no longer a need for the Emergency Liquidity Facility, as detailed in the SENS dated 15 September 2020. Land Bank has subsequently confirmed that the full R3bn equity injection, which was appropriated as part of the June Emergency Budget tabled by the Minister of Finance, has been received. The payment of this R3bn was made in two equal traches, the final payment of which was received on 30 September 2020.
The implementation of the liability solution (which includes restructuring the existing debt) is also delayed, with the new implementation date, as indicated in a SENS dated 22 September 2020, of late November 2020.
Importantly, the most recent SENS provides for a 5% capital reduction for all funders at the time of the implementation of the liability solution. If the liability solution is not implemented by 30 November 2020, the SENS details that this payment will be made by no later than 28 February 2021. This was a key provision that noteholders agreed with Land Bank in response to their stated intention communicated to noteholders in August 2020, to repay certain DFIs in September. This 5% repayment to funders protects the principle of treating all creditors equally which Land Bank had undertaken to do, publically (via SENS) and in private communications with noteholders. One of the Noteholder conditions in agreeing to the DFI payment in August, was that the funds to be used for the 5% liability reduction had to be set aside. As at 30 September 2020, Land Bank confirmed that this was the case in a letter from the CEO to the Noteholder Committee.
Futuregrowth remains an active participant in the Noteholder Committee (together with c.9 other institutional asset managers who hold Land Bank debt) – having been engaged since April 2020 with the Land Bank and its advisors on the restructure of Land Bank following its notice of Event of Default. As part of this restructure, and due to the lack of collective action and debt standstill provisions that arise from Land Bank’s unique legal status, holders of Land Bank debt have been in a “de facto” debt standstill. Noteholders continue to rely on the Land Bank’s undertakings to treat all creditors fairly.
There is regular dialogue between noteholders and the Land Bank and its advisors, and with National Treasury. We understand that this matter continues to receive urgent attention by management, National Treasury and lenders to restore the Land Bank to sustainability. Progress since the first SENS notifying the market of this default on 20 April 2020 has been slow. Current indications are that Land Bank will continue to uphold the principles of fair treatment for all creditors during the restructure process and that the implementation of the liability restructure is delayed beyond the timelines originally outlined in the 17 June 2020 SENS.
We continue to assess all new information as it is made available.
What is needed?
The current liquidity shortfall experienced by Land Bank, coupled with the fact that a significant portion of its debt is funded with a maturity of less than 12 months (approximately 41% at March 2020), necessitates a coordinated, speedy and constructive engagement amongst all stakeholders - most notably by the government as the shareholder (and represented by the Minister of Finance) - in order to address the liquidity crisis that caused the Event of Default and to move forward with a plan to restore Land Bank’s position to that of a sustainable enterprise that serves developmental and economic needs. As a key partner in developmental finance in South Africa for over 20 years, and as a significant funder, historically of Land Bank, Futuregrowth continues to work with Land Bank and other key stakeholders to support them through this challenging period, insofar as this can be done whilst honouring our fiduciary duty to our clients.
From the funders’ side there were broadly two groups: The Noteholders Committee (i.e. those holding Land Bank listed and unlisted debt instruments), which continues to work on the implementation of the liability solution and a smaller group of potential Emergency Liquidity Providers, which has, as of mid-September 2020, fallen away. The Noteholders Committee is seeking to protect their investors, gather information, ensure the debts (capital and interest) are serviced, and where possible repaid, and that any resultant liability solution is sustainable, appropriate and results in a better outcome for existing noteholders than the current position. The Emergency Liquidity Providers group, which included commercial bank lenders, as well as a few institutional investors, was in negotiations with the Land Bank, National Treasury and their advisors about the provision of an emergency liquidity facility that would have allowed Land Bank to remain operational during this period but that was subsequently deemed unnecessary due to the earlier-than-expected injection of the R3bn equity from the shareholder (government).
Futuregrowth continues to be an active participant in the Noteholder Committee with the goal to achieve a sustainable solution for our clients and the Land Bank. The key focus of the Noteholder Committee at this stage is to negotiate appropriate terms and conditions for the liability solution, including the DMTN and the proposed partial guarantee. We believe a key determinant of the likely success of the proposed liability solution is investors being suitably comfortable that the terms and conditions of the DMTN and the proposed guarantee are appropriate and mitigate the risks of continuing to lend our clients’ money to a distressed entity.
Latest financial information
Land Bank released financial performance figures mid-September to lenders, indicating that they remain solvent and adequately capitalised, with a Capital Adequacy Ratio of 11.7% as at June 2020. This ratio would have been 17.6%, including the R3bn equity injection by National Treasury, of which R1.5bn was received on 11 September 2020 with the remainder expected at the end of September 2020.
The period ended 30 June 2020 saw Land Bank’s loan book negatively impacted by restricted disbursements due to liquidity challenges of the Bank. The non-performing loans increased to 14.9% (31 March: 11.4%), with management indicating that the NPL ratio will increase even further as the loan book reduces over time.
Cash on hand at the end of June improved to R1.9bn (31 March 2019: R723m), as a result of restrictions imposed on disbursements. Net loans and advances declined to R40.8bn at 30 June 2020 (March 2020: R42.6bn; March 2019: R44.17bn) due to increased credit provisioning at 31 March 2020 and a reduction in disbursements.
The restrictions imposed on distributions have resulted in declines in net interest income by c. 40%. For the financial year ended 31 March 2020, credit impairments increased to R1.8bn due to additional provisioning required post a review of the loan book and IFRS9 adjustments. This has pushed Land Bank to an operating loss of R1.95bn at 31 March 2020 (31 March 2019: operating profit of R46m). For the period up until 30 June 2020, impairments were stable at R45m.
Impact on credit view
We expected that IFRS9 and additional provisioning would severely affect the income statement of Land Bank, however, we are comfortable that there are still sufficient levels of capital at Land Bank, with the loan book adequately provided for. A better performing agricultural sector, supported by recent good rains, should assist the Land Bank’s farmers and in turn result in better debt collections from farmers. We are concerned that Land Bank’s stated intention to “right-size” their balance sheet may mean that the higher-quality borrowers may move away from the Land Bank, and that existing borrowers may be constrained by Land Bank’s active decision to advance only a portion (50%) of facilities, with implications for the quality of the loan book over time.
This note is based on information we have at the time of writing, and we will endeavour to update it as and when circumstances change.
 Development Finance Institution