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ANALYSIS | How far will the R3bn recapitalisation take the Land Bank?

ANALYSIS | How far will the R3bn recapitalisation take the Land Bank?

03 July 2020

 

The recapitalisation of the Land Bank announced by National Treasury last week has given the lender some breathing space by preventing imminent default on some of its debt that fell due in June and the near-term.

It should also help the Bank succeed in raising capital in the financial markets again, but it may still take a while before it can start issuing new loans again, say analysts.

Finance Minister Tito Mboweni announced during the supplementary budget on 24 June that the bank will be the only state-owned company to get a cash injection of R3 billion. The Land Bank has been under a liquidity crunch since early this year, after ratings agency Moody’s downgraded its global credit ratings in January.

 

 

The recapitalisation won’t solve all Land Bank’s problems

On Thursday, the state-owned developmental financial institution said while it has been recapitalised by Treasury, it is still looking for the R3 billion liquidity facility to help cover its operating expenses and pay out some loans it approved to farmers.

“The State’s recapitalisation amount is not a replacement of the liquidity financing that the Bank is in the process to raise. The R3 billion recapitalisation from the State will be used by the Bank largely to provide comfort of the Bank’s ability to service its repayment of the liquidity facility when the settlement falls due,” said the Land Bank in response to questions.

Dr Sifiso Ntombela, trade economist at the National Agricultural Marketing Council, said while the equity injection does not solve the Land Bank’s the long-term issues that will be addressed when the bank undergoes its proposed restructuring it sends a strong message of government’s support to the capital markets and hopefully it will pave way for the SA Reserve Bank to reconsider reinstating the Land Bank’s own notes as security.

“That will really assist the bank to secure more lending. But in the immediate term, it doesn’t help farmers to access funds for working capital. But depending on how good they are in the market they will be able to accept new loan books and service existing transactions where they’ve already approved applications,” he said.

 

 

Why the Land Bank can’t be allowed to fail

Chris Potgieter, head of Old Mutual Wealth Private Client Securities, said this vote of confidence shown by Treasury is encouraging as the Land Bank is one state-owned company that truly deserves government’s support, given its developmental mandate and its key role in ensuring food security.

But the Land Bank also needed this support from its shareholder to maintain the confidence of holders of its debt.

 

“The Land Bank needs continued access to capital markets, especially because it’s funding is skewed towards shorter-term debt while the life span of the loans it extends to farmers, in other words the assets on its balance sheet, tend to be longer-term.

“Their problem now is really liquidity and if that is not addressed, it can lead to technical insolvency,” he said.

He said although the recapitalisation has helped the Bank avoid imminent defaults, it will need additional support to go back to its full operational capability as primary lender to agriculture.

The Land Bank funds approximately 27% of agricultural debt in SA and most of the emerging farmers it provides funding to cannot access loans from commercial banks.

Because of its “systemic importance” in SA’s financial system, Potgieter said it is in the interest of both the shareholder and the bank’s other lenders to address the mismatch in the Land Bank liabilities and its funding sources.

“The Land Bank is probably the bank of first resort for emerging farmers. There are some other players that provide developmental finance but without the Land Bank, emerging farmers will find it hard to remain viable. There are not enough alternative funding sources for them,” said Potgieter.

He added that the Land Bank, like commercial banks, will also be under more strain this year from increased bad debts as farmers – and businesses – fall on hard times and require more support from funders.

 

Source: News24

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