What the Land Bank’s potential event of default means for UNIGRO Financial Services

UNIGRO Financial Services (“UNIGRO’’) received and took note of the Land Bank’s (“the Bank’’) SENS announcement on 20 April 2020. UNIGRO and the Bank have a significant partnership in place through a Service Level Agreement, which has endured since 2011. Having held several meetings and having been in communication with the Bank in the weeks prior to this, as well as more recently, we would like to assure our clients that the Bank and UNIGRO are doing all we can to ensure farmers’ needs are addressed at this time. We also commit to keeping you informed of any new developments regarding this issue.

The background
On 21 January 2020 Moody’s Investor Service (“Moody’s”) announced the downgrade of the Bank’s issuer rating from Baa3 to Ba1, and its long-term national scale issuer rating (NSR) from Aa1 to Aa3. Following Moody’s downgrade of South Africa’s sovereign credit rating on 27 March 2020, another downward rating adjustment was made to all state-owned entities. This meant that the Bank’s issuer rating was downgraded again from Ba1 to Ba2.

What caused the Land Bank to declare a potential event of default?
The above events had a significant impact on the liquidity position (cash flow) of the Bank, with the following developments being noted by the Bank as having exacerbated the situation:

  • some of the Bank’s lenders withdrew their facilities with the Bank, while other investors reduced the roll-over of maturing facilities in order to operate within their investment policies that have restrictions on the level of investments made to organisations with the Bank’s current credit rating;
  • most of the Bank’s funders and investors began a review process to establish their risk appetite position in relation to the Bank’s ability to service its funding facilities; and
  • all of these events took place at a time when the Bank was in its peak period of loan drawdowns by its customers (as farmers prepared for both the summer and winter planting periods).

As a result, the Bank experienced a liquidity shortfall, which means it is not able to meet immediate obligations to settle a repayment under the terms of a revolving credit facility with one of its lenders.

What is the Bank doing to resolve the issue?
The non-payment constitutes a default that the Bank needs to remedy – it is currently in consultation with the lender concerned to negotiate a waiver and an extension of the repayment date.

What does this mean for UNIGRO?

  1. The SENS issued by the Bank ‘advises note holders holding listed notes issued under Land Bank’s JSE-listed (i) ZAR 20 Billion DMTN Programme dated 18 October 2010 (the “2010 Programme”) and its (ii) ZAR 30 Billion DMTN Programme dated 13 March 2017 that a potential Event of Default has occurred under the terms of both the 2010 Programme and the 2017 Programme.’ UNIGRO does not hold any notes in these programmes and so is not exposed to the risk of default under the note programmes.
  2. Will the potential default affect UNIGRO and most importantly the farmers who have Land Bank loans through UNIGRO? The Bank uses the note programmes to fund its balance sheet. While the potential default could impact the Bank’s ability to maintain or raise funding, we are confident that through our joint efforts that UNIGRO and the Bank can support current farmer commitments.
  3. UNIGRO and the AFGRI Group have enjoyed a long relationship with Land Bank. What is the status of this relationship now? The relationship remains positive and we are working with the Bank to ensure our farmers are serviced effectively.
  4. What is the current total size of the book that UNIGRO manages on behalf of the Bank? UNIGRO currently manages R15 billion of the farmer debtor book on behalf of the Bank. For now, we are able to and will continue to service this book.
  5. What will happen in the longer term? The potential default could prevent the Bank from raising funding. This could negatively impact on UNIGRO’s ability to provide liquidity to farmers through their loan agreements. This could mean that farmers funded by UNIGRO might not be able to procure their inputs to plant for the next season, which could in turn potentially affect food security in South Africa. However, again we stress that the Bank and UNIGRO are working together to ensure that this does not happen. As part of AFGRI Agri Services, one of South Africa’s leading agribusinesses, we are backed by a more than 90-year heritage in grain and agriculture. We are committed to the continued success of our farmers and to the agricultural sector, now and into the future.