CORPORATE BANKING & STRUCTURED INVESTMENTS

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Anne Nichols
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1 15 June 2018 JOBS FUND MEZZANINE FINANCING FOR AGRICULTURAL SECTOR TRANSFORMATION CORPORATE BANKING & STRUCTURED INVESTMENTS

2 Conflicting Expectations from DFIs Land Bank, as a DFI is faced with conflicting goals and opposing imperatives in respect of development objectives and financial sustainability. Developmental objectives Borrowings at commercial rates Profitability and sustainability

3 Land Bank s Funding Dichotomy Borrowing and Sustainability (Commercial): The Bank has a self-funding mandate no direct financial support from Treasury. Organisational growth and sustainability has to be achieved internally. Bank s funding requirements accessed competitively on financial markets, at commercial rates. Necessary to generate margins over borrowing costs. Target Lending Market Characteristics (Transformational/Developmental): Strong transformational and developmental characteristics, borrowers with limited own resources, low debt affordability and requiring low cost/soft funding. Higher risk transactions, without concomitant risk pricing. Generally lower debt collateralisation, compared to commercial banks. - MISMATCH BETWEEN SOURCE AND APPLICATION OF FUNDS - CONFLICTING SUSTAINABILITY AND TRANSFORMATIONAL IMPERATIVES

4 Needs of Emerging Farmers Emerging farmers require: Access to finance Access to land and water Technical assistance Access to markets Business support Land Bank s funding limitation: Land Bank Act does not allow loans to be made without collateral being provided by borrowers. Emerging farmers lack: Collateral and own equity to raise funding Hence strong barrier to entry, limited transformation and creation of viable and sustainable HDI owned commercial enterprises

5 Transactional Funding Challenges Emerging farmer transactions often characterised by: Own funding resources extremely limited - require unaffordable levels of gearing. Applicants do not have access to equity partners. Land Bank unable to lower interest rates to affordable levels - whilst maintaining its own sustainability. Hence un-bankable risk characteristics and unaffordable debt service. Borrowing ability and enterprise growth remain constrained. Proposals that may otherwise be commercially viable are not always fundable. Black entrepreneurs remain excluded from the sector. NEED FOR INDEPENDENT SOURCE OF RISK CAPITAL TO SUPPORT FUNDING TO EMERGING BLACK AGRI-ENTREPRENEURS

6 Other Land Bank Initiatives Other new initiatives currently being pursued to enhance Black participation in the agri-sector include: DFPT: JOBS Fund grant funding and interest free Industry funding. Majority Black owned businesses in the deciduous fruit value chain. Coupled with comprehensive technical, marketing and business support. [Debt finance only.] DAFF Grant Funding: DAFF grant funding to be used in conjunction with DFI and commercial bank funding. [Smaller deals. Applicants not yet at commercial scale. Grant portion not repayable.] DRDLR: Blended funding initiative with DRDLR grants. Black owned agri business applications [that must have an element of land acquisition.] Enterprise Development Fund:

7 Mezzanine Fund Product Proposal This Mezzanine Funding Proposal encompasses: R200m in grant funding by the Jobs Fund, comprising: R150m for mezzanine lending. R25m for technical, marketing and business support. R25m for insurance risk cover. Land Bank matching mezzanine funding of R110m. Additional R40m of mezzanine funding underwritten by Land Bank on behalf of industry partners. Land Bank typically requires a return of 15% (based on Prime of 10%) on mezzanine funding. Owing to the 50% grant contribution in the resultant R300m total mezzanine fund, the required mezzanine return will halve, thereby availing more affordable risk funding to borrowers. Coupled with R300m of Land Bank senior debt, a total of R600m in blended funding will be mobilised.

8 Pricing Mezzanine Debt Pricing: Indicative interest rate of Prime + 5%, currently 15%, on Land Bank and Industry component. JOBS Fund component of mezzanine funding has zero return requirement, but is repayable - for sustainability of fund. Resultant blended mezzanine pricing offered to borrowers. Commercial Land Bank Debt Pricing: Normal risk-adjusted Land Bank interest rates applicable.

9 Indicative Blended Lending Rate Required return on R150m JOBS Fund grant : 0% Interest rate on LB/Industry R150m mezzanine debt (Prime + 5%) : 15% Hence blended return required on mezzanine debt of R300m : 7,5% Bank s senior debt lending rate (assumed at Prime) for R300m : 10% Hence total blended lending rate for mezzanine and senior debt : 8,75% i.e. Prime 1.25% N.B: Equivalent Blended rate without JOBS Fund grant = 12.5%, i.e. Prime + 2,5%. Funding exposure and risk, in the absence of the loss buffer provided by the grant, would also be unacceptable.

10 Nature of Funding Land Bank & Industry Mezzanine Funding Characteristics: Convertible notes, preference shares. 2 nd ranking collateral, behind any commercial Land Bank debt funding. JOBS Fund Grant Funding: Forms a component of the above Land Bank and Industry mezzanine funding package, and is repayable by borrowers. Complementary Land Bank Senior Debt Characteristics: Normal interests rates 1 st ranking collateral Sculpted repayment profiles/ payment moratoriums/ interest capitalisation

11 Mezzanine Fund Objectives Objectives: Financial support to commercially viable but underfunded Black owned agrisector enterprises. Improve collateral quality of such borrowers so as to enable senior debt finance. Creation of additional productive capacity and employment opportunities. Driving transformation and inclusiveness across value chains in the agri-sector. Stimulate development and transformation through economically viable projects which would otherwise not be fundable. Provide technical, marketing and business support to aid these enterprises, through industry partnerships. Provide cost and revenue benefits to borrowers through supply chain and marketing value chain integration with commercial partners. (A very important consideration for the JOBS Fund). Mitigate risks of borrowers through providing insurance cover.

12 Benefits Through Industry Partnerships Benefits to underlying borrowers: Comprehensive technical, marketing and business support - up-skilling for commercial independence. Supply chain and value chain integration with commercial partner - improved input pricing and terms; secure off-takes and improved revenues through value chain. Benefits to lenders: Gearing and cash flow related risks reduced - business support and integration into supply and marketing chains. Improved certainty of funding disbursements being utilised for their designated purposes, through commercial partner involvement. Improved access to borrower proceeds for debt service. Benefits to commercial partners: Improved BEE scorecard benefits. Funded business support program.

13 Supporting Responsibilities of Parties Land Bank: Identify and develop transaction pipeline in conjunction with industry partners. Structure industry partnership for transactions. Provide full banking services in respect of funding and executing transactions. Procure and manage industry partner services and linkages, as well as review and monitor same. Comprehensive portfolio and Fund management and reporting, including to JOBS Fund. Managing borrower and industry partner relationships as required. Industry Partners: Identify key participants in their own programmes suited for funding. Provide comprehensive business support, supply chain, value chain and market channel integration to borrowers. Report on borrower performance to Land Bank and correct as necessary.

14 Application of Funds Applicants > 50% Black owned (or funded transaction must achieve this). Higher Black shareholding will be ranked higher. Soft funding will only be used for HDI partner contribution. Full agricultural value chain funding Start-up projects or expansions (must create new capacity, not just change of ownership) Development costs Production loans (debt funded) Infrastructure Land purchase (undeveloped land, not already established) Total funding per transaction to range approximately between R15m and R40m Offtakes from funded enterprises will be co-ordinated via industry bodies where possible, rather than through single off-takers, so as to mitigate offtake risks. The Deciduous fruit sector will be excluded, due to it being supported by an alternative JOBS Fund approval.

15 Sourcing of Deal Pipeline Land Bank sourcing: Directly through the Bank s existing network of 25 offices. Leveraging off its close relationships with the agri sector Industry Partners: Many are driving transformational projects within their own sectors and are a good source of suitable funding transactions and partnerships. Industry partners will be relied upon to co-ordinate/provide technical, marketing and business support to funded enterprises, as well as participate financially.

16 Transactional Flow of Funds BUSINESS SUPPORT FUNDING MANAGED BY LAND BANK LAND BANK MEZZANINE FUNDING R110m UNDERWRITTEN BY LAND BANK INDUSTRY BODY R40m MEZZANINE FUNDING (Underwritten by Land Bank) JOBS FUND R200m GRANT RING-FENCED BUSINESS SUPPORT ACCOUNT HELD BY LAND BANK R150m R25m RING-FENCED MEZZANINE BANK ACCOUNT HELD BY LAND BANK (R300m MEZZANINE FUNDS) RING-FENCED INSURANCE BANK ACCOUNT HELD BY LAND BANK (R25m) PREMIUMS TO LAND BANK INSURANCE COMPANY R25m LAND BANK SENIOR DEBT FUNDING INTO RING-FENCED ACCOUNT (R300m SENIOR DEBT) INSURANCE CLAIM PAYOUTS MANAGED BY LAND BANK MEZZANINE DRAWDOWN MEZZANINE RETURNS BORROWER SENIOR DEBT DRAWDOWN SENIOR DEBT REPAYMENT

17 FUND OWNERSHIP STRUCTURE The fund will be held on balance sheet by Land Bank in the following ring-fenced bank accounts. Land Bank R300m RING-FENCED MEZZANINE BANK ACCOUNT R300m RING-FENCED SENIOR DEBT ACCOUNT R25m RING-FENCED INSURANCE FUND ACCOUNT R25m RING-FENCED BUSINESS SUPPORT ACCOUNT

18 Downstream Funding Potential Long term fund sustainability and growth is envisaged: Capital growth of the fund. Mobilising additional grant funding to maintain low blended cost of funding. Additional DFI funding sourced from IDC, PIC etc. Private sector funding sources attracted. Attract corporate funding from leading food producers and retail chain groups. Participation by increasing numbers of industry bodies, so as to expand funding reach into more agricultural sub-sector value chains.

19 THANK YOU!

Portfolio Committee on Agriculture, Forestry & Fisheries. Land Bank: CEO. Transformation and Inclusive Growth in the Agricultural Sector

Portfolio Committee on Agriculture, Forestry & Fisheries DATE: 24 April 2018 Transformation and Inclusive Growth in the Agricultural Sector Presentation by: TP Nchocho Land Bank: CEO CONTENT 1. Introduction