SOUTH AFRICA – Land and Development Bank of South Africa (Land Bank), government owned development bank and the biggest lender to farmers in the country is seeking R3 billion loan (US$167m) financing from some of its creditors to cover its operational expenses and pay out some of its interest.
The liquidity-constrained finance institution defaulted on some of its debt that was due towards the end of April, triggering a cross default on a R50 billion (US$2.7 billion) bond programme worsening an already dire cash flow situation.
To this regard the bank has appointed the Rand Merchant Bank to advise it regarding this urgent capital raising.
According to Fin24, the woes of the state-owned developmental bank started when Moody’s Investor Services put its credit rating on review in November.
“We started experiencing some liquidity issues at the bank. Some of the investors started to reduce their exposure to the bank and some facilities that we had were frozen,” said Land Bank CEO, Ayanda Kanana, who was appointed just after the credit rating downgrade.
When Moody’s downgraded SA’s sovereign rating in March into “junk,” Land Bank was further relegated into sub investment grade.
Kanana added that because farming has cycles, farmers generally use rolling credit facilities that allow them to borrow again, meaning much longer capital repayment periods as money is recycled in the farming communities. The Land Bank then uses these short-term debt facilities to stay afloat.
“So, the bank cannot run away from borrowing money in order to pay other creditors. Once you are in a situation where your rating has been reduced to the extent that we are in, lenders become uncomfortable. And that has largely contributed to our liquidity situation,” said Kanana.
But there were also other factors at play: the climate-related disasters, like droughts and livestock diseases were already pushing the Land Bank’s non-performing loans to uncomfortable levels. Kanana said these loans were now sitting over R5 billion (US$278.4m).
Initially the National Treasury, which is the Land Bank’s shareholder, said it was considering assistance for the bank, in the form of recapitalisation and further guarantees.
But it changed its tune earlier in May, saying there was no space to recapitalise the Land Bank in the current budget.
However, the bank said National Treasury is in support of the R3 billion (US$167m) it is asking for, “Land Bank’s shareholder, National Treasury, is supportive of the process and is actively participating in these discussions.”
It also announced that its intention was to have this money in within the next two weeks. The bank is currently not able to accept new credit applications, nor pay a cent to any of its creditors.