Land Bank, the state-owned specialist lender to commercial and emerging farmers, has skipped repayments on its revolving credit facility, triggering a default and potentially putting the government on the hook for as much as R5.7bn.

"The issuer failed to make a payment when due to a lender," Land Bank said. "The nonpayment of this amount constitutes an event of default."

The bank, which swung into a nearly R185m loss in the six months to end September 2019 due to muted loan book growth, is grappling with a liquidity shortfall and is in talks with stakeholders about potentially deferring financial obligations falling due, it said in a statement to bondholders on Monday.

The default is ill-timed for the government, which is using its stretched finances to combat the Covid-19 pandemic and to prop up small businesses fighting for survival and employees missing work and forfeiting their salaries during the lockdown.

Land Bank recently sought and received a large increase in guarantees, announcing in February that the Treasury had provided government guarantees amounting to R5.7bn. This means the government would be required to honour debts up to this amount of funding to the bank’s sources.

The bank also said it is in discussions with the lender and is seeking a waiver in the event of default, presumably to prevent other creditors asking for their money back.

Expropriation

The bank has undertaken a strategy to increase the term loan of its debt by moving away from short-term funding and was one of the first institutions to warn about the dangers of expropriation without compensation, saying back in 2018 it would require government assistance if enacted.

Land Bank, which declined further comment, had loans and advances of R44bn as of March 2019. It has not reported results for the financial year to end-March 2020.

Credit ratings agency Moody’s Investors Service downgraded Land Bank in January, citing "elevated credit risks, declining capital and low earnings generating capacity" as well as policy uncertainty relating to the expropriation without compensation policy the governing party was embarking on.

By its own count, Land Bank provides 28% of the country’s agricultural debt and was previously lauded as an example of a well-run state-owned entity that relied on very low levels of government support by way of guarantees to fulfil its objectives.

The bank finally appointed a permanent CEO, after a string of interim CEOs, on March 1 when it announced Ayanda Kanana would lead the organisation.

thompsonw@businesslive.co.za