The Land Bank is no longer able to accept new credit applications, nor pay a cent to any of its creditors, and even needs to even source money to disburse some of loans it has already approved elsewhere.
The troubled state-owned developmental bank appeared before the Standing Committee on Appropriations on Wednesday, where it told Parliament of its woes, which started when Moody's Investor Services put its credit rating on review in November.
The Land Bank, which defaulted on some of its debt in April, triggering a cross default on its other bonds, said before the review and the subsequent credit rating downgrade two months later, it was cash-flush and able to repay its debt in time - and even released government guarantees, an assertion that National Treasury also backed.
After the downgrade
"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.
The challenge of financing developmental agriculture
Kanana said 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 bilion.
The bank was in need of recapitalisation before Moody's placed the Land Bank on review. The bank approached National Treasury in July 2019 for recapitalisation because its business was growing beyond what its balance sheet could support.
By February 2020, the Land Bank had increased the proportion of its loans falling under the transformation and development mandate to 20% from 0% a decade earlier. In July 2019, its loan book size also increased more than threefold compared to 2009, the last time it was recapitalised by R3.5 billion.
Treasury is supporting the Land Bank
The chief director of National Treasury's Liability Management Unit, Tshepiso Moahloli said when the Land Bank reached out to it about its liquidity problems in February, it first wanted to understand what the underlying issues were because there isn't "a pot of unlimited money".
"There are many other state objectives that are competing for the same resources," she said.
She said Treasury's inability to give the Land Bank the R22 billion recapitalisation it applied for was "not a sign of lack of commitment from the government" and did not suggest that the Land Bank is unimportant. She said the bank can also attest to the support Treasury has provided and has committed to continue providing.
However, Moahloli said some structural changes are needed at the Land Bank because it cannot continue growing beyond what its balance sheet can afford.