The Land Bank, a South African state entity, is in trouble, warning in late April that it might default on payment. Not as well known as the big listed retail and commercial banks, the Land Bank is a vitally important national institution as it props up the commercial agriculture sector. If it disappears, food inflation could soar. That’s the message from one of South Africa’s top developmental and fixed interest investment experts, Ms Tarryn Sankar of Futuregrowth, which has funds that hold Land Bank debt. In this podcast, the head of listed credit speaks to Jackie Cameron about what has been happening behind the scenes of this bank crisis.
I’m Jackie Cameron from Biznews.com. Last week the Land Bank warned via the Stock Exchange News Service that it might default on payment. Ms Tarryn Sankar is the head of listed credit at Futuregrowth and a credit analyst at Futuregrowth. Futuregrowth is an asset manager with not far off two hundred billion rand under management and it includes Land Bank debt in its funds. Ms Sankar, let’s first talk about the role of the Land Bank in the economy. Who owns it? How does it get its funds? And which parties are affected when it gets into a situation like this?
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So the Land Bank is a state-owned enterprise in South Africa. Its shield and ministry is the Minister of Finance and so the National Treasury plays a key oversight role. The Land Bank is funded through a combination of institutional wholesale funding as well as commercial bank funding and funding from other SOEs. And so, the affected parties in actual default that have occurred with the Land Bank would be largely the institutional asset management community and largely South African based – who would be significant holders of Land Bank’s listed notes, along with the commercial banks and some other SOEs as well.
So what types of clients would be investing in one of your funds that would have exposure to the Land Bank?
So these are institutional investors largely (we manage third party assets on behalf of pension fund clients) and the way that the Land Bank’s funding is currently structured is that there’s a significant portion of their funding that is short term in nature. So the type of institutional client that would be invested in Land Bank paper typically is your money market type investors (and we know that these are very conservative low risk type funds) and so an event of default on Land Bank paper – where there’s a concentration of short term funding – does create a lot of risks and concerns for money market and short-term income type funds invested in the listed notes of the Land Bank. So Jackie, I want to jump back to the question that you asked around the role of the Land Bank in the South African economy. Currently, the Land Bank funds roughly 27 percent of agricultural debt in South Africa. So, this clearly makes him a significant role player in the agricultural sector and de facto it means that about 27 percent of South Africa’s food supply hinges on the effective functioning of the Land Bank. Should the Land Bank not function effectively as a result of this event of default – and what that means is that they are unable to disburse loans to commercial and emerging farmers – it could result in a situation where South Africa becomes increasingly reliant on imported foods and that naturally poses risks to food inflation. So, in the current Covid-19 crisis and with global supply chains being disrupted – supply side risks to food security in South Africa have certainly increased in the aftermath of this Land Bank default. And then another important point to note about the role of the Land Bank is that it’s quite a peculiar state-owned enterprise in that it’s a commercial and a developmental bank rolled up into one entity. So, on the developmental side the Land Bank plays a really critical role in providing funding to emerging farmers and enabling them to transition into established commercial farmers. And so, the absence of liquidity (as Land Bank suggests – this liquidity crisis that they’re facing) affects the ability to adequately support emerging farmers and, in that way, grow and broaden the South African commercial farming base which is also important for securing the current and long-term food security of the country.
The Land Bank isn’t a particularly well-known name like other banks, but it clearly sounds like it’s a critical pillar in the South African economy?
It’s quite peculiar in that it’s not a company as defined or governed under the South African Companies Act. And even though it is a commercial and developmental bank – it’s not regulated as a bank. It is its own legal person under its own statute – the Land and Development Bank Act – and our understanding is that that is the only piece of legislation that effectively governs the functioning of the Land Bank.
And what actually sparked the announcement on SENS last week? What was happening behind the scenes?
The bank crisis started – as with many crises – slowly, slowly and then all at once. We started picking up on signs of imminent liquidity strain as early as February 2020. And naturally, hindsight is a perfect science and it would be easy but disingenuous for me to sit here today and tell you that we could have seen this coming. And so, at the heart of this current Land Bank crisis – it speaks to governance concerns and a lack of stable permanent management. So, the Land Bank was without a permanent CEO for as long as the past 13 months, it was without a permanent CFO for as long as the past seven months. And so, I think the key takeaway for us (and it really just affirms our views around governance, in particular) is that non-financial risks; risks related to management teams, the stability of management teams – they ultimately translate into financial risks. And so, this crisis of liquidity that the Land Bank currently faces or finds itself in has been brought about by that precise lack of a stable and permanent management – which ultimately impacts investor confidence in the Land Bank and that impacts the ability to fund themselves, which allows them to disburse loans to emerging and commercial farmers. So the Land Bank hasn’t been present or active in the local South African debt capital markets since at least October, November in 2019 – and there were a number of issues related to governance and the lack of permanent management.
We understand that Futuregrowth has also previously warned of weakening governance along with organisations like Moody’s – the international credit ratings agency. Do you think there’s been corruption at the Land Bank or was this more a case of incompetence?
The information that we’ve seen and the analysis that we’ve done to date doesn’t seem to suggest any corruption or malfeasance (that we have engaged extensively around governance since 2016 and we continue to engage extensively). We do have concerns about the management team and the board of directors, but the ethical base of the organisation is not the primary concern at this time.
Futuregrowth seems to have been engaged in discussions with top management and you’ve been looking at trying to set things right at the Land Bank. Have these been fact finding discussions or are you able to influence what happens at an institute like the Land Bank?
So we’ve participated, along with a host of other institutions through various institutional bodies such as the Association for Savings and Investment South Africa (ASISA) to understand and protect our rights as note holders under the Land Bank’s listed domestic medium-term note program. There certainly is an element of fact finding that needs to happen as you grapple with the particular contours of this crisis. And the key question that we’re faced with as investors – and what will inform any likely action that we take – is whether this is, in fact, a crisis of liquidity or a crisis of solvency. They have different implications. A liquidity crisis implies that it’s short-term, it’s more easily capable of being resolved – provided access to additional liquidity, whereas a solvency crisis is something that’s a lot more pervasive. It’s a lot harder to solve. It’s more costly to solve. A solvency crisis requires some sort of recapitalisation. And at this current time, based on the information that we have to hand, investors are still outlining the contours of this crisis and trying to understand whether it falls within the former or the latter camp – liquidity or solvency. All indications to date show that it’s a liquidity crisis, but it’s very early on in the crisis and that assessment may well change as new information emerges. The other point that I had wanted to make about liquidity and solvency crises – is that liquidity crises can be easily morphed into solvency crises. And when I say that, what I mean is that – the Land Bank’s inability to access sufficient liquidity to extend loans to these commercial and emergent farmers means that their loan book isn’t growing and their cost base remains unchanged. These are employee costs, utilities – the standard costs that they would incur. In the absence of loan book growth which then results in revenue growth in the form of interest income – those costs become increasingly challenging to cover and that’s how a liquidity crisis could morph into a solvency crisis if left unattended for too long.
Is the Land Bank problem an isolated matter, would you say? Is it a victim of the Covid-19 pandemic? What lessons do you think we can draw from the current situation at the Land Bank about development finance and fixed interest investments in general right now?
In our assessment many of the issues that are plaguing the Land Bank pre-date this Covid-19 crisis, and when I say that what I’m referring to is the executive management lacks, the structural nature of the Land Bank (the fact that these is a commercial and development bank sitting within one bank and it’s two very different cost structures, which impacts the competitiveness of the loans that they’re able to offer to emerging and commercial farmers) as well as capital injection of recapitalisation on its balance sheet, a more stable and more responsible funding split between short and long-term use of funding. All of those factors have certainly contributed to the current position the Land Bank finds itself in and those factors pre-date Covid-19. But what Covid-19 does highlight is that the challenges that we see at Land Bank is not a Land Bank problem or a National Treasury problem – it really is a system wide problem. When we speak about the issue of food security and food inflation – that affects every South African, it affects every person in this country. And so, I think what Covid-19 has really highlighted is how the shift of the dialogue and the narrative and the analytical work, to be frank, that we do as responsible investors needs to transition and grow up in a way – from focusing purely on sustainability or having sustainability at its heart and start shifting towards resilience and asking questions around how we build resilient economic systems, how we build resilient agricultural sectors and institutional investors – what role do they play as responsible investors in helping to build these resilient systems. So, clearly the resilience of food security and the important role of the Land Bank has been highlighted and brought to the fore by Covid. And certainly there are Covid related risks. We can recognise and appreciate that the National Treasury as the shareholder clearly has a lot on its plate in developing what, by all accounts, is a very impressive fiscal support package in the order of 500 billion rand that will have far-reaching consequences for the livelihood and the health and welfare, quite frankly, of every South African. And so, there is this trade-off of sorts – which is interesting to see in the light of Covid, where the governments are needing to make decisions between the health and welfare of its citizens and how it responds from a public health perspective, from a physical perspective to Covid-19 risks and balancing food security. So, it certainly is a very fine balancing act, but we recognise that this is an ‘US’ problem and that we are certainly all in it together – to quote the catch phrase or the slogan of Covid-19.
What’s next for the Land Bank? What happens after a warning like this has been issued?
So, clearly this warning is a sign that there’s an urgent need for all parties including Land Bank management, the shareholder (as represented by the Minister of Finance and National Treasury funders) and others to rapidly formulate a sustainable solution that will address the Land Bank’s significant and immediate liquidity challenges, in the first instance, as well as its longer term funding and structural challenges, in the second instance. And these challenges, as I mentioned – some of them predate Covid-19 but Covid-19 has certainly exacerbated these challenges, as has the event of default on the listed notes. From a Futuregrowth perspective, we are participating in broader industry and stakeholder discussions although, we note that at this current time, there is no concrete action that has yet been taken.
That was Ms Tarryn Sankar of Futuregrowth. She is one of South Africa’s top specialists on development and fixed interest investments.
