South Africa mulls Land Bank bailout as another state firm flops

South Africa is considering bailing out yet another state-owned company, at a time when it needs all the money it can get to revive an economy felled by the coronavirus pandemic.

The National Treasury said Tuesday it’s mulling more aid for the nation’s largest agricultural lender, the Land and Agricultural Development Bank, in the form of a recapitalisation and more guarantees on its debt. Last week, the state-owned national airline failed to convince the government it needs extra financial aid, although talks on alternatives for South African Airways continue.

The Land Bank is seeking waivers from its creditors after missing a loan repayment, triggering a default event that could leave the government liable for R5.7 billion — a guarantee the state provided in February. It comes as President Cyril Ramaphosa’s administration prepares a series of measures to support citizens and companies in distress because of a nationwide lockdown to curb the spread of Covid-19.

“The demands on National Treasury are enormous and unrelenting,” said Jones Gondo, a credit analyst at Nedbank Group. “The contingent risks are beginning to crystallise because these entities are unable to withstand this economic shock we are in. The choices have become binary: either bailout or closures.”

While Finance Minister Tito Mboweni has pledged to curtail financial support for cash-strapped state-owned companies, the Land Bank’s latest woes are a reminder of how difficult that task is. Mboweni has long cited his desire to shut companies draining the nation’s coffers, but has run into resistance from factions within the ruling party and its alliance partners in the South African Communist Party and labor unions.

Mismanagement, corruption

Years of mismanagement and corruption have crippled state companies including power utility Eskom, arms manufacturer Denel and the national broadcaster. The government has guaranteed about R480 billion of debt issued by state-owned entities and is on the hook for R980 billion of contingent liabilities, according to the Treasury. Those liabilities are equivalent to about 60% of its total revenue.

Assistance to the Land Bank would need to be “accompanied by balance sheet optimisation,” while it would also have to “correct the structural liquidity risk embedded” in its balance sheet, the Treasury said in an emailed response to questions.

The Land Bank’s failure could cause borrowing costs for farmers to surge and, if not dealt with fast enough, threaten food security, said Omri van Zyl, the executive director for AgriSA, the nation’s largest farmers group. The Land Bank funds more than 30% of the industry.

“Farmers can’t absorb additional costs of raising capital,” Van Zyl said.

Read: Land Bank: Possible default on R50 billion notes

The Land Bank in 2017 signed a $300 million 10-year facility that was arranged by Standard Chartered. The debt was backed by a guarantee from the Multilateral Investment Guarantee Agency, the political risk insurance and credit enhancement arm of the World Bank, the Land Bank said at the time. It has R13.8 billion of bonds, according to data compiled by Bloomberg.

“Each case is unique, but what is common is that SOEs have been in financial trouble for far too long — given the government’s slow pace of meaningful reform implementation,” Nedbank’s Gondo said.

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