The crisis is evolving rapidly
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. We believe that the government, likewise, considers it to be a strategic contributor to agricultural development. 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.
Taking on board the current news, the rising arrears in Land Bank’s loan book, its capital position and funding profile, our provisional view (albeit based on incomplete information, which could change as the story evolves and additional facts come to light) is that Land Bank is currently suffering from an acute liquidity crisis - and not a solvency crisis. The former is more resolvable than the latter.
However we also note, that a sustained liquidity crisis can (and does, if left unresolved) shift into a solvency crisis due the degrading quality of the underlying receivables book. Currently roughly 27% of agricultural debt in South Africa is 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, 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.
Given the above, we would expect that this matter is receiving the urgent attention that is required by management, the shareholder ministry, and lenders to address the immediate liquidity crisis and restore the Land Bank to sustainability. This latter will likely require some recapitalization of the Land Bank, and possibly a refocusing of its areas of operation. We await further information in this regard.
What is needed?
The current liquidity shortfall experienced by Land Bank, coupled with the fact that a significant portion of Land Bank’s debt is funded with a maturity of less than 12 months, necessitates a coordinated, speedy and constructive engagement amongst all stakeholders, most notably the government as the shareholder (and represented by the Minister of Finance) - in order to address the immediate liquidity crisis 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, we will endeavour 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.
Land Bank’s situation is fast-moving. This note is based on information on hand at the time of writing, and we will endeavour to update it as and when circumstances change.