Govt pensions used to bail out struggling Denel

South Africa’s state asset manager has quietly bought up almost 90% of cash-strapped arms manufacturer Denel’s bonds in the past 12 months, data from the country’s main securities depository showed.

The previously undisclosed funding by the Public Investment Corporation (PIC), which manages R2 trillion of investments for the government, sheds new light on the precariousness of Denel’s financial position.

It also shows the extent of state support for Denel at a time when private investors say they are reluctant to lend to the weapons company because of its previous management’s involvement in a corruption scandal.

Faced with an election next year, President Cyril Ramaphosa is fighting to keep struggling state-owned companies like Denel and power utility Eskom afloat. But he also wants to preserve SA’s last investment-grade credit rating, the loss of which could trigger large capital outflows.

Ramaphosa recently ruled out for that reason a request by Eskom for the state to take on R100 billion of its debt.

A senior lawmaker in the Democratic Alliance (DA) said the purchase of Denel debt by the PIC amounted to a bailout by stealth.

“This is a state bailout, irrespective whether it is a grant from National Treasury or a PIC investment via bonds,” said Kobus Marais, the DA’s shadow minister for defence. “Denel must be sustainable on its own.”

The PIC only held about R350 million of Denel bonds in March 2017, but from December last year it started to dramatically increase those holdings, data from SA’s Central Securities Depository showed.

As of December 14, the PIC owned R2.8 billion of Denel bonds, out of the company’s issuance of R3.15 billion.

The PIC purchased the bulk of that debt via private placements in December 2017, September 2018 and this month.

It bought almost R2.5 billion of debt – issued to refinance older borrowing – in September alone. That same month, Denel was unable to pay senior staff in full because of “liquidity challenges”.

Two former Denel executives told Reuters many banks and large private investors had refused to lend to Denel, citing governance concerns. They said by September, the company did not have cash to meet maturing debt repayments, putting it at risk of default.

Asked about the PIC’s purchases of Denel’s bonds, the arms company’s spokesperson said: “Denel has been successful in raising sufficient funds from the bond markets to ensure that it is in a position to honour its obligations. It will soon become profitable and operationally sustainable.”

The PIC’s current holdings of Denel’s debt are held on behalf of the Unemployment Insurance Fund and Compensation Commissioner, two funds the state uses to pay benefits to unemployed, sick or injured people.

“State-owned entities, in which the PIC is invested on behalf of its clients, service their interest payments as required and to date there have been no defaults,” the PIC said in a statement to Reuters, confirming it owned R2.8 billion of Denel bonds.

A spokesperson for the National Treasury, responsible for the PIC, said the state asset manager took its own investment decisions.

INFO

Denel’s debt woes

• Denel recorded a R1.7 billion loss – its first in eight years – in the financial year that ended in March, and has struggled to pay suppliers and employee salaries.
• Defence industry officials have said Denel requires new equity partners to survive in the long term.
• Contributing to Denel’s woes was its involvement in an influence-peddling scandal involving associates of former president Jacob Zuma that made investors wary.
• Denel, which relies almost entirely on short- and medium-term bond issues, issued a new R290 million bond on December 11, the proceeds of which were used to repay the City of Joburg.

– Reuters

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