Denel faces the risk of being placed under business rescue or even in liquidation due to its dire financial position, the National Treasury said today.
In a presentation to parliament, Treasury said Denel is facing a number of challenges, exacerbated by the COVID-19 pandemic. As operations have come to a standstill, Denel is unable to honour financial obligations and this includes the payment of salaries, creditors, statutory payments (medical aid, tax, UIF) and debt payments (interest payments under guaranteed debt amounting to R3.415 billion).
The failure to meet financial obligations has resulted in labour unions taking the entity to court for unpaid salaries and as a result Denel faces the risk of being placed under business rescue.
Another challenge is the slow implementation of Denel’s turnaround plan, which has resulted in the following strategic initiatives being delayed: the sale of non-core assets, property portfolio and establishment of strategic equity partnerships; and finalising the future state of Denel, which is anticipated to assist in identifying the role that the entity is expected to play in the defence industry, considering the country’s requirements.
The departure of Denel Group CEO Danie du Toit in August 2020 “may be perceived as exacerbating the risks associated with effective implementation of the agreed turnaround plan.”
The Treasury said the capital structure of Denel remains overwhelmingly short-term, increasing liquidity risk and Denel continues to report revenue losses in 2020/21 and missed budget targets due to liquidity challenges.
Denel’s forecasted loss at year ended March 2020 is R1.8 billion, with a forecasted negative equity position of R3.3 billion (at year ended March 2020).
To support Denel, the state has provided guarantee facilities amounting to R6.93 billion, recapitalisation of R1.8 billion (2019/20) and further funding of R576 million to be allocated in 2020/21 (to reduce guaranteed debt).
While Denel has not requested additional financial support, it has instead requested that it be able to use R504 million for working capital instead of repaying guaranteed debt.
Before du Toit left office, he complained that Denel’s capital injections were only allowed to service debt and not go towards operations or salaries, meaning Denel could not trade its way out of its current situation.