April 24, 2020 / 10:00 AM / a month ago

Land Bank debt default draws attention to South African state firms' finances

JOHANNESBURG (Reuters) - A South African state-owned bank that lends to the farms sector said on Friday it had defaulted on payments on two bond programmes worth a combined 50 billion rand ($2.63 billion), highlighting the weakness of state enterprises in the country.

Ratings agency Fitch had already said on Thursday that the lender, Land Bank, had defaulted on debt and that risks posed by state-owned enterprises had been a factor in its decision to lower South Africa’s credit rating this month to BB, from BB+.

Land Bank is one of several state-owned firms that are facing financial difficulties and piling pressure on President Cyril Ramaphosa’s cash-strapped government as it scrambles to revive a recession hit-economy.

The bank, which funds commercial and emerging farmers, said on Monday that it was experiencing a liquidity shortfall and was in talks with various stakeholders to address its financial obligations.

The lender warned investors that it was at risk of defaulting on its 20 billion rand ($1.05 billion) Domestic Medium Term Note (DMTN) Programme dated 18 October 2010 and its 30 Billion rand DMTN Programme dated 13 March 2017.

“Those defaults have subsequently occurred,” the lender said in a statement dated April 23, but issued on Friday.

Fitch said Land Bank’s default could influence the ratings agency’s assessment of other state-owned enterprises including transport and logistics group Transnet and power utility Eskom.

Moody’s downgraded the lender’s corporate family rating and long-term issuer ratings to B1 from Ba2, and its national scale issuer ratings to Baa2.za/P-2.za from Aa3.za/P-1.za, it said on Friday.

The ratings agency also placed all of Land Bank’s ratings on review for further downgrade.

“The decision to place the ratings on review for downgrade reflects the risk that Land Bank and its major shareholder fail to promptly address cash flow and funding issues, which can lead to solvency issues and potential losses for Land Bank’s creditors,” Moody’s said.

It added that Friday’s downgrades were a result of its assessment that the government’s willingness and capacity to support Land Bank is weaker than previously anticipated.

Land Bank, which had a gross loan book of around 45.2 billion rand in 2019, is a key lender in the agricultural sector, with a market share of 29% of South Africa’s agricultural debt, according to industry body Agri SA.

The National Treasury said assistance in the form of recapitalisation and further guarantees was under consideration.

“[This] would have to be accompanied by balance sheet optimisation of the Land Bank to correct the structural liquidity risk embedded in the balance sheet,” the Treasury said in a statement.

Fitch added: “We expect the government to continue to support the development banks, as they are an important part of the government’s strategy to maintain and expand investment in the context of rising constraints on direct fiscal spending.

Reporting by Tanisha Heiberg, additional reportig by Nqobile Dludla; Editing by Susan Fenton and Mark Heinrich

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