Carol Paton Writer at Large
Moody's signage is displayed outside of the company's headquarters in New York. Picture: BLOOMBERG/ GETTY IMAGES/ RAMIN TALAIE
Moody's signage is displayed outside of the company's headquarters in New York. Picture: BLOOMBERG/ GETTY IMAGES/ RAMIN TALAIE

Moody’s Investors Service has raised the red flag on the Land Bank, placing it on review for downgrade due to its deteriorating stand-alone credit profile, the agency said on Tuesday.

This is a step more aggressive than the Moody’s warning on SA’s sovereign rating last Friday in which the agency changed the outlook from stable to negative. While this normally implies a 12- to 18-month window before the next rating action, negative watch means an entity usually has 30-90 days before a determination is made.

Moody’s also downgraded Eskom’s unsecured debt — which is not guaranteed by the government — by one notch, placing it deeper into junk territory, six notches from investment grade. Eskom’s problems are far from solved, says the agency, and “important questions, including how the rights of existing creditors will be respected as Eskom is reorganised, remain unanswered”.

The Development Bank of Southern Africa and Industrial Development Corporation issuer ratings were affirmed at Baa3 and the outlook changed from stable to negative in line with SA’s sovereign rating and are unlikely to change before Moody’s reviews it.

As a company serving the broader agricultural sector [it] is faced with rising physical environmental risks … which will disrupt the ability of the bank’s customers to repay their loans
Moody’s Investors Service

But the Land Bank could face a downgrade far sooner. Significantly, Moody’s says it has already further lowered the bank’s “baseline credit assessment” — an indication of its stand-alone credit strength — to the equivalent of two notches into junk and may downgrade this further, possibly by more than one notch.

Three heightened risks have made this possible: an increase in non-performing loans; environmental risks, linked to climate change; and expropriation without compensation. Between 2017 and 2018, non-performing loans rose by two percentage points to 8.8%. But the bank has underprovided for non-performing loans and underestimated environmental risks.

“Moody’s believes that [the] Land Bank’s exposure to environmental risks is high. As a company serving the broader agricultural sector [it] is faced with rising physical environmental risks, such as the sustained droughts, uncharacteristic hail in usually hail-free areas, and increased frequency of disease outbursts … which will disrupt the ability of the bank’s customers to repay their loans.”

There is also a risk that “poor execution of clauses, such as that of land expropriation without compensation, could result in loss of investor confidence, the drying up of funding sources, or even trigger an immediate repayment of debt that includes a standard market event clause on ‘expropriation as an event of default’,” it says.

In the near term, Moody’s says it will assess the government’s ability to stand behind the Land Bank financially given its own fiscal pressures.