The State-owned Land Bank, which provides about 29% of South Africa's agricultural debt, has briefed the Standing Committee on Appropriations about the magnitude of liquidity challenges it is facing, the total value of its defaulted loans, the reasons for its current liquidity challenges and possible solutions and support available to it.

The bank’s financial position has had a significant direct impact on its clients and indirect impact on the agricultural sector value chain.

In the last five years, significant efforts have been made to grow the Development and Transformational Loan Book – it has grown by R6.6-billion.

Supporting development and transformation have proven to be a challenging task, the bank noted, owing to the cost of the bank's funding being based on commercial interest rates from the capital markets and the strict financial covenants that it has to adhere to.

The bank’s key financial performance indices have been relatively strong for the past four years but the operating profit and nonperformance loans have experienced strain owing to a challenging agricultural operating environment.

The bank’s liquidity position had been relatively very strong until the 2020 financial year, when the impact of the recent challenges were experienced.  

As the liability profile mix shifted from 70% in short term funding in the 2015 financial year to 42% in the 2020 financial year, the cost of funding increased to 9.1%.

Moreover, the bank has not concomitantly repriced its loan book to effectively match the increase in the cost of funding.

As a results, the net interest margin has been significantly reduced and is the subject of the bank’s initiatives to correct this negative trend.

The squeeze on margins poses challenges for the bank in its developmental mandate given the cost of doing business in the developmental sector.

In terms of liquidity challenges, Moody’s Investors Service placed the bank on review for downgrade/negative outlook owing to a weakening standalone credit profile, the government’s capacity and willingness to support in case of need and the weakening standalone credit profile.

On January 21, the Land Bank Issuer rating was downgraded to Ba I, and its long-term national scale issuer ratings to Aa3.za.

Concurrently, the rating agency confirmed the bank’s b I baseline credit assignment and assigned a corporate family rating of Ba I.

Following the announcement of the initial January downgrade, the bank’s ability to access some undrawn facilities was negatively impacted, leaving it with reduced access to immediate funding; and some funders received their investments with the banks as funding lines matured.

As a result, the bank’s liquidity came under serious strain, exacerbated by the fact that it had last been in the debt market in September 2019.

The bank approached and obtained support from the shareholder with an approval of R5.7-billion of guarantees for its fund raising programme.

Following the sovereign ratings downgrade, all the development finance institutions were downgraded, including the Land Bank. This happened at a time when the Covid-19 impact was starting to have a negative impact on the economy and the agricultural sector.

The implications of the downgrade included disinvestment by investors continuing; pressures on liquidity increasing and breach of loan covenants experienced. The bank subsequently defaulted with funders and the breach of loan covenants and defaults disrupted the consultation of funding lines that were in the pipeline on the back of the support by the State’s guarantees.

Resulting from the default event, the third downgrade of the bank followed on April 24, at which point its liquidity position reached distressed levels.

The bank has implemented various interventions to try to mitigate the liquidity challenges.

The bank noted on May 20 that, at this time, the magnitude of its liquidity challenges was of crisis proportions. As funding lines mature, the bank gets into further defaults.

It is not in a position to support agriculture in the form of additional loans – this at the start of a new planting and harvesting cycle.

The stage of negotiations with funders has necessitated confidentiality from the bank publicly sharing the magnitude in rand values, it stated.

In terms of recommendations proposed by the Land Bank, it is required to address immediate liquidity needs. It needs to find a longer-term liability solution and an optimised balance sheet with the appropriate mix of tenures of funding, and loan profile.

Another recommendation is that the bank repurpose its strategy for an improved operating model that will deliver a financially sustainable bank, with increased development impact.

Sate recapitalisation of the bank is also a consideration in the process to strengthen its balance sheet.