Public Enterprises Minister Pravin Gordhan begged for Johannesburg Mayor Herman Mashaba’s “indulgence” not to liquidate state-owned arms company Denel because of its “critical importance” to the “country’s security”.
Mashaba threatened to liquidate Denel after it failed to repay a R290m loan from the city’s sinking fund two months ago. The money was lent in the form of a “note paper”, a bond-like financial instrument, to Denel in 2012 through the Gupta-linked financial advisory and investment company Regiments Capital, which falls under Regiments Fund Managers.
The note was supposed to mature in June but Denel was unable to honour it and repay the money by the June 10 deadline. Gordhan had to step in to buy time.
In the letter dated June 8 Gordhan tells Mashaba that Finance Minister Nhlanhla Nene is considering a lifeline for the embattled state-owned company.
“An application for a government guarantee, aimed at providing interim support to the company, has already been considered by the minister of finance,” he wrote.
“In addition, consideration will be given to the need for appropriate funding for the company, but the earliest this could occur is at the medium-term budget policy statement in October 2018.
“I therefore request your indulgence in rolling over this maturity for a short period of time to be agreed by both parties to allow government and the board to implement the interventions.”
He advises Mashaba to “engage National Treasury on the circumstances surrounding the involvement of Regiments Capital”.
In the letter Gordhan further states: “As a strategic arms manufacturer Denel fulfils a role of critical importance for ensuring the country’s security ... Denel has responsibility for preserving certain sovereign and strategic defence capabilities which, if lost, would threaten South Africa’s defence capability and consequently our sovereignty.”
In an interview on Friday Mashaba said Mncedisi Ndlovu & Sedumedi (MNS) Attorneys and the city’s internal forensic investigation unit were probing the legality of the contract between the city and Regiments Capital. Mashaba said that as of June more than R2.2bn remained under the care of Regiments and the city was concerned about the security of the funds.
“There have also been allegations of irregular appointment and allegations that the tender was tailored.
“The city has recently received information that suggests the company was the most expensive compared with the 11 other companies that bid for the contract.”
Mashaba said Regiments Securities arranged the private placement of R290m from the fund to Denel in a way that means the “city’s funds are essentially unsecured”.
In his letter Gordhan painted a bleak picture of the state of Denel. “Since 2016 Denel’s financial position has been deteriorating due to a number of challenges, including a weak board and management, project management failures and allegations of deep corruption that went on unabated.”
Gordhan outlines the steps his department is taking to get the company back on its feet, including the appointment of an experienced interim board, the replacement of the chief executive officer, undertaking forensic investigations to root out corruption and revising a “corporate plan”.
Regiments Capital executive director Niven Pillay said the city invested the money with the company in 2013 and was given regular monthly and quarterly progress reports. The fund was subjected to at least four audits since the investment was made, he said.
“The claim that the private placement method of transacting rendered the note ‘unsecured’ is incorrect. “In fact the method of placement has no bearing on whether a note is secured or not. The bond issue was registered with and settled via the JSE/Bond Exchange,” Pillay said.
“As the political head of the city of Johannesburg, mayor Mashaba should know that the fund is being run very efficiently. The credit quality of the sinking fund portfolio is arguably stronger than any comparable portfolio in the market. The fund has suffered not a single credit default in more than 12 years.”
Pillay said there was “no cause to be alarmist, as there is no danger that the sinking fund will not be paid or that the city will lose any money”.
“Denel, National Treasury and the DPE [department of public enterprises] requested that Regiments extend the maturity of this note by six months. The city agreed to this extension directly with DPE on the basis that Treasury undertook to honour the new redemption date.
“The city has always understood the exceptional performance of Regiments and has always been complimentary,” Pillay said.
He denied that the tender Regiments won from the city was tailored in its favour, saying that “the services of Regiments were procured after a competitive, open and transparent procurement process” managed by Deloitte. He also denied that Regiments was the most expensive company on the list of bidders.
Denel spokesperson Vuyelwa Qinga said the company “has a continuous process of managing the company’s debt exposure to ensure that operations are not affected”.
“The debt you are referring to forms part of the standard Denel debt portfolio of secured and unsecured debt and is managed accordingly.
“It is customary for Denel to issue notes on a secured or unsecured basis through investment managers without knowing who the ultimate holders of the notes/bonds are ... At maturity of the said bonds it came to Denel’s attention that the bonds were held on behalf of the city of Johannesburg [CoJ].
“Denel engaged with CoJ, which was willing to extend the bonds on an unsecured basis to December 2018. The bonds were extended on normal commercial terms and rates, to the benefit of both parties.”
MNS Attorneys managing director Tshiamo Sedumedi confirmed the city appointed his firm to review its relationship with Regiments.
Regiments Capital has been embroiled in the allegations of state capture through its association with Gupta-linked Trillian Capital Partners. Former Regiments’ director Eric Wood left the company to start Trillian with Gupta lieutenant Salim Essa.
Regiments executive chairperson Litha Nyhonyha has since denied any Gupta association, reportedly saying: “We are on public record as saying that we rejected the attempts by the controversial family in April 2015 to buy a majority stake in our company and make us dollar billionaires.”
Gordhan’s spokesperson, Richard Mantu, confirmed that the minister intervened after Denel could not secure alternative funding.