South Africa’s central bank has temporarily prohibited the use of debt issued by the Land Bank as collateral after the state agricultural lender was downgraded deeper into junk status and missed $2.7 billion in loan repayments.
The South African Reserve Bank’s (SARB) decision will put additional pressure on the banking system, especially commercial and investment banks and institutional investors, which are already starved of the debt instruments necessary to access overnight cash to fund their daily operations.
The Land Bank had its credit rating cut to B1 from Ba2 by Moody’s in January, while Fitch has also warned of downgrades, and the lender defaulted on the loans totalling 50 billion rand in late April, citing a “liquidity shortfall”.
“In light of recent developments surrounding the Land Bank, including the downgrade of the rating and the subsequent debt default, the SARB has taken a decision to temporarily suspend Land Bank bills as eligible collateral in its repo operations,” the central bank said late on Friday.
Since the novel coronavirus outbreak prompted a national lockdown to limit its spread in March, local capital markets have suffered a severe lack of liquidity as investors rushed to sell emerging market assets.
That forced the typically conservative SARB to step with unconventional policy including a government bond-buying program and additional repurchase, or repo auctions to pump liquidity into funding markets.
The moves have so far been effective, but the removal of the Land Bank’s debt from the list of securities allowed for the weekly repo auctions may reignite funding pressures.
It will also hurt the Land Bank’s already strained ability to fund its operations and pay down debt, 50% of which matures in less than a year while another 10% is due in the next three years.
EFFECTIVE ON WEDNESDAY
The suspension is effective as of Wednesday when the central bank holds it main weekly repo auction, Samantha Springfield, senior manager in the SARB’s market operations and analysis division, said on Saturday.
“So any Land Bank paper that we currently have, that will then be returned to whichever banks have pledged it as collateral,” said Springfield.
The central bank currently accepts government bonds, treasury bills and central bank dentures as collateral at its weekly repo auctions. Land Bank bills were the only form of debt from a state-owned company accepted by the bank as collateral.
The National Treasury, which guarantees around 5.7 billion of the Land Bank’s debt, has yet to grant the lender any emergency funding.
In a 2019 presentation to investors the Land Bank said 17.5% of its debt was held by commercial banks while nearly 40% was with institutional investors.
Analysts have speculated that the treasury may increase issuance of treasury bills to meet demand which has climbed at recent auctions, as well as to plug a growing revenue hole.