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 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.
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. 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 the current status of Land Bank’s plans to resolve its defaults, its liquidity position and longer-term liability profile, our prevailing view (albeit based on information available to date, which could change as the story evolves and additional facts come to light) is that Land Bank continues to suffer 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 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.
As at the date of writing this update, we are cautiously encouraged by the SENS announcement of 17 June 2020. While we recognise that further clarity and more concrete actions are needed over the next few weeks to give effect to the proposals and intentions contained therein, the Board’s confirmation of Land Bank’s solvency as at 31 March 2020 and that no loss of capital or interest on Land Bank debt instruments is anticipated, is noteworthy. We further note the tabling of a R3 billion appropriation for Land Bank in the Supplementary Budget Review on 24 June 2020, which provides further tangible evidence of government’s willingness to support this strategically important entity. We understand that this matter continues to receive urgent attention by management, the shareholder ministry, and lenders to address the immediate liquidity crisis and restore the Land Bank to sustainability. Progress since the first SENS notifying the market of this default on 20 April 2020 has been slow, although we believe the direction of travel to be positive. We expect events and actions to gather momentum in the next few weeks to realise the concrete steps needed towards the resolution of this matter. 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, 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 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, 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 are broadly two groups: The Noteholders Committee (i.e. those holding Land Bank listed and unlisted debt instruments), and a smaller group of potential Emergency Liquidity Providers. 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 includes commercial bank lenders, as well as a few institutional investors, is in negotiations with the Land Bank, National Treasury and their advisors about the provision of an emergency liquidity facility that will allow Land Bank to remain operational during this period. The collective goal is to assist Land Bank through its current crisis and restructuring period, and for Land Bank to service its agricultural customers through the crop cycle.
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.