EDITORIAL: Land Bank rethink is poor timing for noteholders
Market is unimpressed with the first complex debt restructuring that has arisen for the Treasury
The restructuring of the debt of Land Bank, which defaulted a year ago, is taking an inordinately long time. And, as time wears on, trust is wearing down as noteholders are confronted with changing liability solutions and with too little information on which to form an opinion.
While the noteholders started out optimistic that a solution would be reached — only one (Standard Chartered) decided to sue — they have now expressed fears that “the deal terms remain uncertain and thus we cannot know where it’s going to land”. So, while it remains within their interests to keep talking — a disorderly wind-down would not work for anyone — investors have lost their pleasant disposition.
A very quick recap of the restructuring process first: for most of last year noteholders of the about R40bn mostly unguaranteed debt felt their interests were being taken care of. They would get new paper and, though it would not be listed debt, it would be backed by a Treasury guarantee. After many months of negotiations, the Treasury reneged on that proposal in January and a new condition was added: that the new paper would have to be held for five years.
With noteholders still reeling, the government added a new dimension: that the Land Bank business model would be substantially changed and split into a developmental book and a commercial one. Their loans would be repaid from the proceeds of the commercial book.
This is more or less where we are now. In February, the Treasury put R7bn on the table for Land Bank but did not spell out how the equity injection was to be used and what its likely impact on the proposed new business model would be. That, it seems, will start to become clearer now. The Land Bank has now said that the equity injection “requires a material change to the liability solution” and that it needs more time to work through this with funders. The new liability solution would have to address the future developmental role of the bank, it said, in line with the instructions of the Treasury.
The redesign of Land Bank to promote land redistribution and reform is an important policy consideration. The slow pace of land reform is one of the country’s most pressing problems. Difficulty in access to finance by black farmers has undoubtedly been one of the reasons. Ironically, it has been caused more by misguided land reform policy than anything else, which has not allowed emerging black farmers to get title deed but has restricted them to a 30-year leasehold.
So while the motivations for a change in the bank’s role and mandate might be good, it will change Land Bank quite fundamentally from one that raises capital in the debt markets to one that is funded by developmental finance and the state.
It is an understatement to say that for noteholders a complete rethink — however worthy — is poor timing. They are now faced with an entirely new animal. Everything depends on the collection of the existing commercial book, while government capacity is weak and in a sector where, due to weather and climate issues, nothing is guaranteed.
Land Bank is the first complex debt restructuring that has arisen for the Treasury and the market is so far unimpressed. It is unlikely to be the last, with debt financing and repayment pressures building up all over the government financial system.
The biggest risk is Eskom, with debt approaching R500bn, which is mostly government guaranteed. The government has been passing that hot potato about for some time. It has been from the presidency to the department of public enterprises to the Treasury and back again several times. No-one has had the courage yet to grab the bull by the horns.
But it should not be left to slide like Land Bank and the debt will have to be dealt with long before ambitious restructuring plans.
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