Land Bank and lenders cross the finish line

16 September 2024
18 min read

Agriculture landscape with mountain view

We have finally crossed the finish line on the Land Bank debt restructure following the event of default in April 2020. It has been a marathon.

We take a look at the four-and-a-half years it took to get here, and provide some reflections on the experience.

How we got here – a timeline

Since 2020, we have engaged in various iterations of proposed solutions (five in total), finally landing on “liability solution 5”. The high-level terms of this were disclosed by the Chair of the Land Bank Board and the Minister of Finance in the media briefing on Monday 9 September 2024, and subsequently. (These can be found here, here and here.)

Each proposal had unique features and was the subject of deep and intense discussion and negotiation between Land Bank, its advisors and the lender groups.

Summary of the various proposals and reasons for replacement

Liability solution 1 (LS1): This was proposed by Land Bank (with the support of its shareholder) and its advisors in 2020. It included a staggered maturity profile of the new notes and benefitted from a 60% partial guarantee from Land Bank’s shareholder (i.e. the South African government). This partial guarantee provided significant credit enhancement to the proposed liability solution.
Liability solution 2 (LS2): This arrived as a storm in January 2021 after National Treasury (NT) declined approval for the partial government guarantee contemplated in LS1. The reasons provided were that the conditions for NT providing the guarantee were not met. This LS2 asked all funders to term-out their loans into a single 5-year amortising note (as opposed to the staggered maturities contemplated in LS1). At that time the 5-year term was problematic for funds that have regulatory constraints limiting their ability to invest in instruments with this maturity. Further, LS2 proposed that creditors have recourse only to Land Bank’s lending book and not to the general balance sheet of Land Bank. Notably, LS2 indicated the government’s intention to materially shrink the size and scope of Land Bank.
Liability solution 3 (LS3): This replaced LS2 and was similar, except that it envisaged a notional splitting of Land Bank’s lending book into a “corporate and commercial” book and a “development and transformation” book. Recourse for bank and institutional funders was proposed to be limited to the “corporate & commercial” book, while the “development and transformation” book was proposed to be funded by the relevant development finance institution (DFI) and guaranteed funders. This proposal also seemingly imposed some conditionality on the proposed R7 billion equity injection that was allocated in the February 2021 budget by then-Finance Minister Tito Mboweni. LS3 contained problematic provisions for many lenders. Each lender had provided loans to Land Bank on the basis of the entire Land Bank balance sheet, and the proposed splitting and ring-fencing of portions to different lender groups was not in line with the original lending terms. It was also misaligned with Land Bank’s stated commitment to treat all creditors fairly in negotiating the restructure. Much of 2021 and early 2022 was spent on LS3, with the lender groups strongly motivating to Land Bank and its stakeholders why the proposal was iniquitous and unlikely to be bankable.
Liability solution 4 (LS4): In response to LS3, in late 2022 we together with a sub-group of some SA lenders, and with the support and advice of PwC (who were selected in February 2022 as financial advisors to the lenders), prepared a LS4 liability solution. LS4 ensured that all funders were exposed to the entire Land Bank balance sheet and that one note, with a uniform set of terms and conditions applicable to all funders, would be issued to replace the defaulted debt. This proposal was sent to Land Bank and its advisors.
Liability solution 5 (LS5): In September 2023 Land Bank proposed LS5 - the final version - which was a modification of LS4. On this basis, the final legal agreements were signed, with an implementation date of 16 September 2024 .

Key features of liability solution 5

The salient features of the final deal LS5 agreed with all funders (including the South African institutions, the South African banks and the international DFIs) are:

With effect from the implementation date, 16 September 2024, all funders will exchange their current instruments for new partially amortising notes with a final maturity date of31 March 2028.
All funders have the same terms and conditions.
During the four-and-a-half year restructure period, just under 60% of capital was repaid to noteholders and hence around 40% of the outstanding principal at the date of default has been exchanged to the new instruments.
LS5 includes two additional capital repayments in the weeks after the implementation date, which further reduces the capital owed to funders.
The government has injected an additional R7 billion as equity, which brings to R10 billion the total quantum of new equity injected by the shareholder since the date of default.
Land Bank has agreed to maintain specific financial and other covenants during the life of the notes.

Complexities of the Land Bank case

Debt restructures are by their nature complex, difficult and time consuming. That said, even when one considers the interruptions caused by the pandemic during 2020 and 2021, four-and-a-half years is a long time to negotiate and resolve what was, from our perspective, a fairly standard event of default.

The Land Bank restructure was made particularly challenging by:

The legal nature of the entity: Land Bank was originally established through its own founding legislation (the Land and Agricultural Bank Act, 2002) and is not governed by the Companies Act. Accordingly, the usual creditor protections and provisions provided by the Companies Act in a financial distress scenario were not available at the time of the event of default and this complicated the remedies available and the process required to agree an acceptable solution for all stakeholders.
The identity of the shareholder (being the government) and the constraints under which it operates: These include legislative restrictions (for example, PFMA restrictions and the way appropriations from the National Revenue Fund can be made) as well as decision-making structures that are not nimble or commercially minded. Further complicating matters was the need to balance often conflicting objectives and the capacity constraints of key stakeholders.
The large number of institutional and bank funders: When Land Bank went into default, its outstanding debt comprised a multitude of lending arrangements. These included short-term facilities, listed bonds issued under two different DMTNs, longer-term bi-lateral loans. Some loans had been guaranteed by the government. The loans were held by a mix of South African banks, South African asset managers, other institutional funders, and some international DFIs. In total, over 50 lending institutions were represented in the deal. Each lending institution has its own mandate and constituency, with most having bespoke lending agreements with Land Bank prior to the default. It was therefore a complex process to negotiate and agree a final liability solution that was bankable, met Land Bank’s objectives and mandate, and ensured fair treatment of all creditors. Getting everyone over the line was a mammoth task, and all stakeholders are to be congratulated for staying the course and negotiating in good faith to a satisfactory outcome.
The Land Bank business model: The Land Bank business model was in a state of flux throughout this period. This included a shift to an increased developmental lending mandate (and, by consequence, a decline in the commercial lending mandate). It was difficult for lenders to assess the risks and form a forward-looking view in these fluctuating circumstances. Land Bank also needed to keep operating, disbursing and collecting loans, and continuing business as usual while negotiating the restructure – akin to flying an aeroplane while a major engine repair is underway.
Board and management changes: Following the default in 2020, several new appointments were made in the Board and the senior management team (including a new CEO appointed in April 2023). Each of the new appointees understandably needed time to become familiar with the business as well as the various restructure proposals, stakeholders and the deal outcomes. This meant that the process sometimes had to take a step or two back before moving forward.

What was done well?

Upholding of key principles: Land Bank committed to (and stated publicly in the initial SENS notices following the default) treating all creditors fairly by adhering to INSOL principles. This enabled us to ensure that all creditors were treated fairly in the negotiation process, the capital repayments made, the ongoing servicing of interest and the final liability solution that was agreed by all stakeholders. This was crucial in the absence of usual statutory protections and remedies, with Land Bank not being governed by the Companies Act legislation.
Shareholder support: Shareholder support – in the form of additional capital injections, open communication, a willingness to negotiate, and the provision of staff, resources and capacity – is critical in ensuring an orderly restructure. This was present in the provision of an additional R10 billion in capital by Land Bank’s shareholder, as well as the availability of key decision makers within National Treasury.
Liquidity: Land Bank was able to manage its liquidity during the period of the restructure. Interest continued to be serviced to all funders and significant chunks of capital were repaid before the conclusion of the final agreed solution. This helped alleviate some of the impact of the default on the lenders while the negotiation process was under way.
Lender co-operation: A remarkable feature of this restructure was the co-operation among the South African lenders – both in the bank group and the asset manager/institutional group. This started in the early days of the default, when the then-Land Bank CEO requested on 24 April 2020, via SENS , that the lenders form coordinating committees to facilitate communication between Land Bank and the lenders. While there were some pain points and differences of opinion, working for the best possible outcome for our respective stakeholders was the key objective and resulted in the successful outcome.
Advisors are crucial: The inclusion, from day one, of legal advisors for the South African institutional funders was key in helping us (as fiduciaries for our client funds) to understand the risks and take steps to adequately protect our clients’ investments. Land Bank is to be credited for moving swiftly (in a matter of days following the default in April 2020) to appoint a set of legal advisors for each of the South African banks and South African institutions. Stakeholder co-operation was substantially enhanced by the appointment of PwC in 2022 as financial advisor to assist and advise the lenders. PwC engaged with each of the lenders to understand their needs and limitations, collated lender feedback on the proposals, term sheets and draft legals, worked with the lenders’ legal advisors to review documents and suggest edits, and assisted with negotiations with Land Bank and its stakeholders. This benefitted both the lenders and the Land Bank, and played a significant role in achieving an agreed solution.

What could have been done better?

Multiple changes to the deal structure: as described above, a total of five liability solutions were proposed over the life of the workout process. The various versions were materially different and necessitated a complete review of terms and a new negotiation every time. This took time and resources, delayed progress and resulted in the eventual deal being concluded well-beyond the initial deadline date of 31 March 2021.
Lack of formal debt standstill legal protections: in the early days after the event of default, one lender approached the courts to demand repayment of its loan. For a time, there was an elevated risk that one or more other lenders would follow suit and enforce their rights for immediate repayment. This would have likely caused a stampede of all lenders doing the same (no-one wants to be the last to claim when there is limited cash available for repayment) and risked collapsing Land Bank. This outcome could have resulted in significant losses for all stakeholders, and made a constructive and solution-orientated negotiation impossible.
In the absence of formal debt standstill arrangements (as are provided under the Companies Act in a business rescue scenario, for example) we were reliant on the goodwill of all the funders to act constructively. It is an important learning, for those entities that may still not be subject to statutory creditor protections and standstill arrangements, that their legislative arrangements are amended as a matter of urgency to incorporate these requirements, to ensure an orderly workout environment.
Delays: Delays due to new appointments at Land Bank and delays by Land Bank’s shareholder in providing responses as a result of internal processes and decision mandates could have been mitigated by an upfront commitment to swifter turnaround times by all stakeholders, and an agreed process of escalation when these timelines were not met. These delays posed risks to our clients, increased the direct costs incurred (of lawyers, financial advisers, etc.) and resulted in some raised temperatures and the risk of deal fatigue.

Going forward

We are grateful for the constructive engagement of the South African lenders, the support and advice of our legal and financial advisors, and the positive spirit and intent shown by the Land Bank Board, its shareholder and management team during this lengthy process.

Having finally crossed the finish line of this marathon, the challenge now is for Land Bank to continue to refocus its efforts on building and growing a sustainable entity that will serve its stakeholders, deliver on its crucial mandate and be able to meet its future obligations. We look forward to witnessing this in the month and years to come

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