(Photo: Scott Eells / Bloomberg via Getty Images)
It is unusual for credit rating agencies to withdraw their corporate ratings, but this has happened before. The timing of Moody’s move couldn’t have been worse, as the bank is racing against the clock to be saved by lenders.
Moody’s Investors Service has pulled all of its credit ratings to the Land Bank, adding to the public lender’s woes as its executives were stranded in emergency meetings this week to avoid its financial collapse.
In a statement, Moody’s said it was withdrawing all credit ratings from Land Bank, citing “its own business reasons” to justify the move.
Moody’s did not provide an exact reason for removing the Land Bank’s credit rating, which is important to South Africa’s food security system as it provides 28% of agricultural debt. South Africa to emerging and established farmers.
The Land Bank had assets of R47.2 billion as of December 2020, much of which – R34.5 billion – is made up of loans to farmers and other actors in the agricultural value chain. In addition to providing loans, the Land Bank has an insurance division that provides coverage to farmers for risks related to agriculture, including drought and disease coverage.
Rating agencies such as Moody’s issue regular assessments of a company’s creditworthiness based on its financial and operational health. Investors often rely on ratings offered by credit rating agencies on a company to make investment decisions or assess its risk profile, especially its ability to repay debt.
It is unusual for credit agencies to withdraw their corporate credit ratings, but it has happened before. A rating agency like Moody’s can withdraw its rating for a variety of reasons, including, but not limited to, insufficient financial information provided by a company that hinders the agency’s ability to assess its creditworthiness, if a company has defaulted on repayment. of its debt to lenders; and if a company goes through a debt restructuring program.
Although Moody’s has said it has withdrawn all of its credit ratings due to its “own business reasons”, Land Bank has been a violator for the aforementioned reasons that a credit rating agency would step down.
Moody’s removal of all credit ratings leaves the company’s lenders in a bind as some lenders have relied on Moody’s ratings of the bank’s creditworthiness in making investment decisions.
Moody’s early warning
Moody’s issued early warnings about the bank’s financial difficulties.
In January 2020, the Land Bank was demoted to junk status by Moody’s, the credit rating agency claiming the bank had declining asset quality, as evidenced by the increase in its downgraded loans that made the profile riskier than that of the banking sector in general. .
At the time, the value of the bank’s loan write-downs (money that may never be collected from borrowers) reached Rand 324.7 million in 2019, nearly six times more than Rand 55.5 million. in 2018.
By April 2020, the financial situation of the Land Bank had deteriorated, as it was officially in default of debt repayment to lenders.
This default event prompted Moody’s to downgrade Land Bank’s creditworthiness in November 2020 deeper into “junk” territory.
Lenders are exposed to Land Bank debt through its National Medium Term Note (DMTN) programs – one launched in 2010 and the other in 2017.
Moody’s publishes regular reviews of the DMTN program and the Land Bank’s ability to repay lenders under the program. DMTN programs are publicly traded debt securities – like a sophisticated credit card used by a business at its discretion – to fund operational activities. To raise funds in the open market, a company would issue debt securities or notes to lenders with the promise to repay the money at a fixed and variable rate of interest at a later stage.
The timing when Moody’s pulled all of its Land Bank credit ratings could not have been worse. The bank has a deadline of March 31, 2021 to agree with lenders on a plan to restructure its debt of more than Rand 40 billion.
But talks with the lenders turned sour as there was no agreement on a bailout. Without a deal, the Land Bank, which suffered financial losses of R 2.8 billion for the fiscal year ended March 31, 2020, could be immediately forced to repay lenders or face liquidation of its operations. DM / BM
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