News of the Land Bank’s R50bn debt default reached the markets just as Covid reared its head in March 2020. It was a delicate period around the world and — unbeknown to many — the start of large-scale disruptions to the world’s supply chains. Food value chains were about to be stretched to their limits. It was a bad time, in other words, for an agricultural lender to find its borrowing and lending activities curtailed.
Fast-forward 2½ years, and the 110-year-old institution has yet to cure the default. The Treasury has the money to effect the remedy; it set the funds aside in the February 2021 budget. But, according to the October medium-term budget policy statement, not all the conditions for the release of R5bn in funds have been met.
“The Land Bank has to conclude a debt restructure solution, or as we call it a liability solution, with creditors, and that [condition] hasn’t been met yet,” acting Land Bank CEO Khensani Mukhari tells the FM. “Negotiations with the lenders are still in progress, as these are complex [discussions]. We are progressing with the talks and hope to get there soon.”
Mukhari, who was appointed permanent CFO of the bank in February 2020, shortly before the default, knew the lender was in difficulty when she started. “It’s been a journey,” she says.
The trouble began at the end of 2019, when the Land Bank cancelled a debt issuance to the market after investors became jittery about its ability to repay debt. This was no small matter in terms of timing: farmers needed production loans to be disbursed by the bank as the summer grain crop was being planted.
There was also concern about high turnover at executive level. Since late 2018, when CEO Tshokolo Nchocho left to lead the Industrial Development Corp, the position became something of a revolving door. First, Land Bank CFO Bennie van Rooy acted as CEO. Then, when he left to lead Grobank in July 2019, the position was filled by the lender’s acting CFO, Konehali Gugushe.
By the end of 2019, the lender had been led by three CEOs in just 12 months.
Then, in January 2020, ratings agency Moody’s downgraded the bank’s debt again — this time to junk. With that, the die was cast: two months later, there was no cash left to repay a debt obligation.
“The bank literally ran out of cash,” says Mukhari. “It wasn’t bankrupt.”
At issue was that the bulk of the Land Bank’s funding was of an unsustainable short-term nature. These short-term liabilities had to carry longer-term loans of up to 20 years to repay land mortgages issued to farmers. It was an approach that drew criticism — and continues to do so.
Things went from bad to worse. While the bank had received an unqualified audit from the auditor-general (AG) in 2019, a year later the AG issued a disclaimer on the bank’s financial statements to end-March 2020 — one of the worst opinions an auditor can give.
It all culminated in the bank’s inability to pay the debt due in March 2020. That in turn triggered a so-called cross default of the entire R50bn outstanding to its creditors. Of this, the government guaranteed R5.7bn, as Business Day reported at the time.
[For] the Land Bank, it could be difficult to lend at subsidised rates if they cannot get subsidised funding. They would have [a] mismatch which is basically subeconomic
— Olga Constantatos
Things could have been worse. “The Land Bank is lucky to have the lenders it has,” Mukhari says of creditors’ attitude towards the institution. “There was only one lender who called in their loan, while the rest remained steadfast behind the bank.”
Shortly after Mukhari’s appointment as CFO in 2020, the Land Bank’s board roped in Ayanda Kanana, then CEO of the Joburg fresh produce market, as permanent CEO. Kanana left in April this year for the private sector, leaving Mukhari to take the reins as acting CEO — now the fifth person in four years to head the lender.
Despite the high CEO turnover, the Land Bank has managed to repay 43% of the debt it had accumulated by the time of its default, says Mukhari.
It’s also focused on improved governance, cleaning up its financial controls. In the 2021 fiscal year, the lender received a qualified opinion from the AG, and its 2022 annual financial statements gained an unqualified audit.
That’s no small feat for a beleaguered institution operating under a default and bleeding market share (its share of farm debt dropped from 29% in 2019 to 22% in December 2020, the last time the market was surveyed, says Mukhari).
One of the actions the Land Bank has taken to cut costs over the past two years has been to insource its service-level agreement debtors’ book. This book consists of wholesale funding it provides to third parties, which lend the money on to their own customers. The bank, in a presentation to parliament’s standing committee on finance in October, said it will save about R300m in the annual management fees charged by the third parties.
One such third party is GWK, based in Douglas. “Notwithstanding the challenges at the Land Bank, GWK could continue delivering financing services to our clients,” the company’s group MD Llewellyn Brooks tells the FM.
The Land Bank has made strides in clearing its debt. But it’s still a long road to sustainability
— What it means:
But the road ahead, particularly regaining the trust of capital market funders, will be fraught. Mukhari acknowledges this. “We expect it is going to take some time after the default to regain the market’s trust,” she says. “Investors need to have confidence in an organisation and that is not going to happen overnight. We will need to show results first.”
This is where things get especially tricky for the Land Bank.
The lender has a developmental mandate. Since its founding in 1912, it has been charged with supporting emerging farmers to help them reach commercial scale. But that ups the risk ante.
Mukhari is all for the developmental approach. “We are tilting more to our developmental financial institution mandate. Previously we were more tilted towards commercial farming due to how we were funded,” she says, referencing the bank’s heavy reliance on capital markets.
However, DA shadow minister for agriculture, land reform & rural development Noko Masipa sounds a note of caution.
First, he flags issues around debt finance. “The Land Bank must build strong discipline on how it uses its funding: short-term for short-term finance and shorter turnaround time [improved responsiveness],” he tells the FM. “It must end its past bad habits of using short-term instruments to fund long-term debt finance.”
He also warns that the bank’s return to developmental financing needs to be carefully balanced. “The Land Bank’s change in its operating model must be for the benefit of both new farmers and commercial farmers. The Land Bank must forget about getting rid of commercial farmers to make space for emerging farmers. This is going to destroy the bank.”
The tilt to emerging farmers is already clear. In late October the bank, together with the department of agriculture, land reform & rural development, launched a blended-finance scheme targeting small and medium-sized farmers and agricultural processors. The scheme combines grant funding (from the department) and debt (from the bank) to allow farmers and processors to buy parcels of land, expand their operations, invest in capital, and secure production loans.
If the Land Bank continues the pivot towards funding the development of emerging farmers, additional state support will be needed because of the higher risk that accompanies developing farmers’ ability to repay debt. It’s something that won’t easily be tolerated by investors and pension funds, which will demand a steep premium to lend to this sector.
In essence, a developmental mandate asks for a new funding approach.
“Developmental finance needs a different funding structure,” Olga Constantatos, head of credit at Futuregrowth Asset Management, tells the FM. For the Land Bank, for example, as the Land Bank, “it could become difficult to lend at subsidised rates if they cannot get subsidised funding. They would have [a] mismatch which is basically subeconomic”.
And, as Constantatos says, subsidised funding is available from more institutions than just the fiscus. “There are various international developmental financial institutions that could offer subsidised funding to institutions such as the Land Bank.”
Still, access to these potential funders would mean the bank has to cure its default sooner rather than later.
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