South Africa Mulls Land Bank Bailout as Virus Relief Beckons

(Bloomberg) -- 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 struggling to cope with the coronavirus.

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 recapitalization and more guarantees on its debt. While the state-owned national airline failed to convince the government it needs extra financial aid, talks to find alternatives to save South African Airways continue.

The Land Bank’s woes come as President Cyril Ramaphosa’s administration prepares to roll out a 500 billion rand ($26 billion) package to shore up an economy devastated by the fallout from the disease. The lender is seeking waivers from its creditors after missing a loan repayment, triggering a default that could leave the government liable for 5.7 billion rand -- a guarantee the state provided in February.

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

South Africa Mulls Land Bank Bailout as Virus Relief Beckons

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 Holdings SOC Ltd., arms manufacturer Denel SOC Ltd. and the national broadcaster. The government has guaranteed about 480 billion rand of debt issued by state-owned entities and is on the hook for 980 billion rand 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 optimization,” while it would also have to “correct the structural liquidity risk embedded” in its books, 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 about 30% of the industry.

The Land Bank in 2017 signed a $300 million 10-year facility that was arranged by Standard Chartered Plc. 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 13.8 billion rand of bonds, according to data compiled by Bloomberg.

The lender in March appointed Ayanda Kanana as chief executive officer, a post that had been empty on a permanent basis since late 2018. Moody’s Investors Services on Jan. 21 flagged governance issues when it downgraded the company’s debt, also citing the government’s diminishing capacity to help the lender.

“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.

©2020 Bloomberg L.P.

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